Five charts on India PE’s coming-of-age

Better returns, GPs shifting focus to larger deals and direct investments show growing optimism in India in the last three years, a report from McKinsey found.

Private equity in India is on an upswing, with steadily improving returns the main reason for investor confidence in the market.

In recent years the industry has focused efforts on exits and consistently returned more capital to investors, with exit value growing more significantly from $6.9 billion in 2015 to $10.8 billion in 2018, according to the report Indian Private Equity: Coming of Age by McKinsey & Company. 

“India has always punched above its weight among emerging markets, in terms of private equity deployment relative to GDP,” Vivek Pandit, senior partner and global co-leader of the private equity and principal investor practice at McKinsey, said in a statement. “We are finally seeing focus and discipline setting in with improvements in returns and exits driven by control-oriented strategies, better sector and owner selection, faster and more purposeful interventions.

India-based managers gathered $6 billion in capital commitments from 2015 to 2017, 50 percent more than the previous three years combined. Increased fundraising volume could be a result of increased allocation to private equity by domestic LPs as well as regulatory actions such as tax breaks and asset classes like alternative investment funds that incentivise pooling of funds in India, the report noted.

Private equity firms have invested more than $97 billion in India since 2003, with more capital deployed in 2017 ($13 billion) than in any year since the global financial crisis.

In line with the global trend of larger funds and bigger deals, PE-backed transactions in India have been fuelled by an expansion in deal size. The number of deals greater than $100 million that closed between 2015-17 more than doubled those in 2012-14, accounting for about a quarter of total deals for the period. Examples include Warburg Pincus’s $120 million investment in cinema chain PVR and Bain Capital’s $450 million acquisition of private sector lender Axis Bank. Investments in financial services made up the lion’s share of PE-backed transactions from 2012-17, fuelled by growth in consumer lending, insurance, microfinance and banking, the report found.

Peeyush Dalmia, a partner at McKinsey, said in the statement that one of the biggest shifts in Indian private equity is the move towards buyouts with about 25 percent of capital in the last three years directed towards the strategy, compared with 6 percent between 2009 to 2011.

“GPs are changing their operating model becoming more active managers,” he said, adding that 28 of the 30 most active funds in India have an in-house operating team or engage senior industry professionals as advisers or partners.