India’s private equity, venture capital investments cross US$60b mark for third year in a row

[NEW DELHI] Amid a funding winter, India – the third-largest tech start-up ecosystem in the world – continued to see healthy investments in private equity and venture capital last year.

PE and VC investments totalled US$61.6 billion in 2022 – slower than the record-breaking year in 2021 (US$69.8 billion) when scores of companies raised money at insane valuations and ignored business fundamentals.

According to data from Bain & Company, PE and VC investments amounted to US$40 billion in the first six months of last year, but slowed considerably to US$21.6 billion in the second half of the year.

Still, the 2022 total was above the US$60 billion mark for the third year in a row, thanks to steady momentum in smaller and mid-sized deals (less than US$100 million). In all, there were over 2,000 deals last year, led by sectors such as manufacturing, healthcare and energy.

Inflation, rising interest rates and geopolitical conflicts have hurt new-age initial public offerings (IPOs) such as Paytm, Nykaa and Zomato in the past year.

Analysts say many PE and VC investors are thinking twice about loosening their purse strings. On their part, startups are exploring different ways to fund working capital requirements over diluting equity at beaten-down valuations.

Data from global consulting firm EY shows 2022 emerged as the best year for PE/VC credit investments in India at US$6.7 billion. Credit investments last year were 158 per cent higher than 2021, and 116 per cent above the previous high in 2019.  

“Amid rising interest rates and the bid-ask spread between investors and seller valuations remaining high, credit has emerged as an opportunity for both private credit investors as well as asset owners to capture value, with many companies looking to raise bridge funding as an alternative to raising equity at less-than-optimal valuation levels,” said EY in a report.

Asset-based financing, revenue-based financing, or lease financing are a few other avenues that many firms are turning to.

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“These are not early-stage startups. (It is the) Series A (funding) and above, the ones having a turnover of 10 million rupees (S$163,360) and above that are doing it,” said Kanishk Singh, head of investments and investor relations at PODWorld, a startup investment platform.

Nithin Kamath, the founder and chief executive of discount brokerage Zerodha, said the ongoing funding winter will teach investors that “businesses must be built differently in India”, where mergers and acquisitions and IPOs to overcome liquidation preference issues “are not easy”.

“Raising a lot of money at high valuations isn’t always good. It may be for the investors to mark up the investment and improve their fund’s performance, but not for founders and teams, whose equity will keep losing value due to liquidation preference with every new round,” said Kamath.

Observers note that the funding crunch is more pronounced in late-stage deals, while it is the early-stage start-ups that are doing better.

“Every other startup was getting funded from 2020 onwards. This funding recession has eliminated the boys from men. Consolidation has happened. It is high time that we bounce back in the market, otherwise the quality start-ups will suffer,” said Singh.

Shwetank Verma, co-founder and managing partner at Leo Capital, expects late-stage funding in India to return in the second half of this year, albeit at muted valuation multiples, said Shwetank Verma.

He noted that with India having the most mature ecosystem in South Asia and South-east Asia, behind only China in the whole of Asia, “the dynamism of the local entrepreneurs means the ecosystem will continue to be an attractive destination for years to come”.

The Bain report added that the opportunity to invest in India remains attractive even as funds continue to stay cautious for the rest of this year. A shift in deal flow is likely to happen in the short term, with a drawdown in the number of larger deals (US$1 billion or more) and a greater focus on the profitability of the portfolio companies.