PE And VC Investment Outlook To Retain Bullish Undertone In FY23
The private equity/venture capital (PE/VC) investment outlook will continue to remain bullish in FY23. The IPO market is expected to witness a slight slowdown with a large number of IPOs coming up. This will open opportunities for PE funds to tap into pre-IPOs or substitute IPOs with PE funds. With losses in most of the tech sector IPOs which were highly valued, a reality check would take place with the VC fund fraternity, pushing their exit plans thru secondary sale, that will eventually suck more capital to sustain. At the same time, companies which are facing headwinds in raising funds through capital markets may be forced to shift back to PE funds.
Going ahead, investors that have the risk-taking ability to go against the tide will be doing better. Those taking a contrarian view would emerge winners. To cite an instance, with industry heavyweights like Tata Motors venturing into the electric vehicles (EV) business, it has gained wider traction. For investors, it presents a strong platform and a carved-out business in which direct equity can be taken.
In order to boost investor confidence, the government will need to place onus on retaining a positive investor climate. Policy-makers will also need to ensure that the capital investment cycle is not adversely impacted.
VC investments in tech equity deals in FY22 witnessed a substantial rise as compared to typical PE deals. There were a large number of controlled transactions by PE funds with VC deals witnessing an equal rise in Series B, Series C and Series D funding. Growth capital investment was comparatively lower whereas big funds like Advent, Carlyle and Blackstone etc took a large position on controlled transactions as it ensured operational control of assets and a smooth exit option for the PE players. With the capital and IPO market remaining very active, there were very few growth capital transaction completed by PE funds. Companies that were raising private equity shifted to IPO’s. The same could be said of tech-oriented VC funds comprising not much of Series A but more of Series C and D and late-stage large capital investments in VC funds.
After the first COVID-19 wave ended and the second wave ebbed, the deal momentum built up but sentiment took a beating because of health issues. The moment it got over, there was a surge in investor confidence at the corporate level. Deal activities surged after the second wave while the third wave did not impact investor sentiment adversely owing to a robust healthcare infrastructure and lower casualty rates. Sectors that gained more traction included chemicals, pharma API’s, building materials and technology across all categories. Sectors including power, infrastructure, garments & textiles etc could not go for IPO’s or equity raise inspite of positive sentiments and the impressive IPO of GR Infraprojects in the infrastructure space or the successful acquisition of Crompton Greaves in the power equipment sector. They could not gain the requisite momentum unlike steel which bounced back.
The reason why some sectors performed poorly while some fared impressively could be attributed to investor attention shifting to sectors which witnessed a good momentum. Different sectors operate in phases of peaks and troughs. Currently the focus is on pharma, chemicals and building materials which are being considered as high value generating sectors. Over a period, auto components, textiles or even Petrochem based businesses will start gaining traction with investors and start looking more attractive.
Starting early 2021, strong macroeconomic fundamentals and bull market conditions ensured that PE and VC investment grew at an aggressive pace. A report brought out by industry lobby Indian Capital Venture Association (ICVA) stated that large scale investments in startups and big-ticket acquisitions dominated the deal landscape in 2021. The report further stated that Indian companies received a total investment of USD 77 billion in 2021, a record high of 62 per cent as compared to 2020.
Technology retained the top slot with PE/VC investments pegged at USD 2.3 billion across 25 deals and ecommerce taking the second position with USD 982 million across 15 deals in November 2021. The acquisition of Encora, a global digital engineering services company by leading global PE firm Advent International at USD 1.5 billion and the investment of USD 840 million in Indian fantasy sports platform by Falcon Edge, DST Global, D1 Capital, Redbird Capital, Tiger Global were the largest deals in the same month.
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