Perspectives 2018 Asia-Pacific: Scaling up India

India, a priority country for the International Finance Corporation, has attracted $11.3 billion of private equity capital from global and domestic investors in the first half of the year, a more than 50 percent increase from the previous year, data from Venture Intelligence show.

IFC, the private investment arm of the World Bank Group, has a total India exposure of $6.5 billion or more than a tenth of its $55 billion portfolio. Since 1958, the investor has been mobilising private capital to reshape the country’s infrastructure, financial services, healthcare, consumer and renewable energy sectors through direct investments, fund commitments and advisory services.

India now ranks as the most attractive emerging market for general partner investment in 2017, followed by South-East Asia and Latin America, according to an EMPEA report. The government’s attempt to improve its investment climate through the implementation of the goods and services tax, cleaning up of banks’ balance sheet and easing of foreign direct investment rules appears to be paying off. The country ranked 40th out of 137 countries on the World Economic Forum’s 2017 global competitiveness ranking – its highest-ever score in WEF’s methodology – brought about by improved market efficiency, business sophistication and innovation.

“Currently we are investing about $2 billion per year in India and we are working towards quickening this pace because of the investment opportunities available,” Jun Zhang, country manager for India at IFC, tells Private Equity International. “Doing $2 billion a year means we’ve invested in about 55 projects. We are looking on a longer-term basis at a double-digit increase in investment value,” he adds.

Zhang says that everyone wants to come to India to invest because the macroeconomic picture is stable, demand is strong and its growth potential is huge. “Recent reforms from the government are also positive news and I believe the corporate governance and regulatory environment will improve through time.”

Unlocking domestic capital

Foreign investors like IFC formed the lion’s share of private equity investments in the country in the past decade but that is changing as domestic institutional investors become more relevant in the Indian market.

Nupur Garg, regional lead for South Asia, private equity & venture capital funds at IFC, tells PEI the investor appetite for India has changed, with more domestic capital being mobilised into private equity funds.

What’s noticeable is that a lot of domestic financial institutions are establishing large programmes backing funds, Garg points out. One example is the government’s 100 billion rupee ($1.5 billion; €1.3 billion) fund of funds managed by Small Industries Development Bank of India (SIDBI). As of end-April this year, SIDBI had backed 88 funds with venture capital strategies including those managed by ICICI Venture, Paragon Partners and Multiples Alternate Asset Management, it said on its website.

Garg also observes that strategic and corporate investors have taken an active interest in backing India-focused funds, a clear sign LPs are more willing to put their money to work. US, European and Asian family offices have similarly started experimenting with funds before getting into direct investing.

The shift in the investor base, however, has not diminished big participation from large global pensions and sovereign wealth funds especially in direct investments. Data from Deloitte showed Canadian pension funds are the most active in India deal flow, deploying up to $5 billion in the last two years. Others such as Singapore’s GIC, Abu Dhabi Investment Authority and Malaysia’s Khazanah Nasional Berhad were also active dealmakers in 2016.

Long-term draw

New investors into the asset class is an emerging sign of market maturity but historical performance remains a concern.

“Similar to other limited partners, the India portfolio has not really performed up to expectations,” Garg says. “We’ve seen a combination of currency depreciation of up to 60 percent, macro headwinds like the global financial crisis and resulting slowdown has led to a slow capex cycle and high leverage.

Added to that India private equity is extremely young: “Through the years the private equity industry has seen a lot of challenges – contractions, consolidation and corrections have taken place. It has matured and at the same time remains very nascent because of the size of the industry and the number of players in comparison with the massive Indian economy, the opportunity and the need for private capital – I think the industry has a lot of growth ahead.”

Weak performance and exit environments have deterred investing in India but latest figures show that is slowly changing.

The industry witnessed the highest value of exits in 2016 in the past five years; private equity and venture firms clocked exits worth $6.8 billion across 239 exits in 2016, according to data from Deloitte. While there was a 19.5 percent decline in the number of deals as compared to last year, overall deal value saw an increase of 17.2 percent, an indication that exits are getting bigger.

“I think LPs need to take a step back and introspect on their decision-making instead of penalising the India private equity market because of its underperformance,” she says. “India private equity is still extremely young and has seen just two fundraising cycles and one full investment cycle. We need to look at the long-term potential of this market, recognise that it’s a long-term market, and that we can’t expect results to come by in three years.”

Most investors targeting emerging markets do so because they expect strong long-term economic growth there and India is no exception. “India is a market that holds great potential and we at IFC really want to be making a difference in the country in the way we have done for its microfinance and energy sectors,” Zhang says.

“However, if you are a short-term investor, India is not the place you want to go. Fund managers need to be patient to see the results.”