Opportunities & Growth Trends in the PE Industry in India

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Opportunities & Growth Trends in the PE Industry in India

Authored by Shivam Bajaj, Founder & CEO at Avener Capital

In 2021, technological innovations, differentiated business models, and a liquidity flux drove transaction activity amid a record-breaking funding rush. PE activity reached an all-time high in 2021 and recorded 2,044 deals worth a whopping value of USD 64.9 billion, up by 44 per cent in volume and 53 per cent in value from 2020. This has led to the rise of 42 unicorns in 2021. 

Sectors such as Ed-tech, D2C, deep-tech, Health/Health-tech, and Information Technology benefitted the most due to technological advancements and changes in lifestyle and consumption patterns induced by the pandemic. Investors preferred companies that are disrupting traditional business models, have huge revenue potential, and are environmentally sustainable. 

The funding momentum shall keep continuing in 2022 albeit at more reasonable valuations. A combination of access to ample dry powder, constant technological innovation, market consolidation, and disruptive business models are the key elements that are driving funding. 

In 2021, Softbank and Tiger Global Management were at the top of their game. From Nykaa to PolicyBazaar to Zomato to Paytm, their portfolio companies had bumper listings. Fast-forward nearly a year, and a much more dismal picture emerges. All the above companies other than Nykaa are trading below their IPO offer price. Billions of investors' wealth have got wiped off due to the underperformance of the scrips on the bourses. 

Macroeconomic conditions coupled with a lacklustre performance of some of the new age businesses listed on the bourses would make investors cautious on valuations. Investors whilst valuing companies will have a greater emphasis on the company’s revenue growth, business scalability, and profitability margins. Assets stroke companies with far-sighted profitability are trading at discount. 

Start-ups are venturing into unknown markets, grabbing new opportunities, and creating a niche for themselves, thereby spiking the interest of PE investors. For instance, Meesho has revolutionized the social commerce market in India by helping retailers from Tier-II and Tier-III cities set up their stores online thereby easing conducting of business in India. 

We could expect heightened PE activity around the following sectors - B2B marketplaces redefining supply chain, agri-tech companies facilitating seamless production & distribution process, SaaS companies, deep-tech companies revolutionising the treatment of life-threatening diseases like cancer, tuberculosis, etc., and defence companies that are manufacturing drones, etc. as they are disrupting traditional businesses, increasing efficiency and reducing costs. 

The current geopolitical situation, supply chain constraints, inflationary concerns, and rising interest rate environment may create headwinds for businesses in the short term, but this should not have any material impact on good quality companies from getting funding from PE. 

Further, as India continues to be one of the fastest emerging markets and becomes broad-based, the outlook for PE investments in 2022 seems promising. 

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