After a record year in 2019, private equity investments in H1 2020 were soft at about $13 billion (excluding investments in Jio), which marked a 40% decline compared to H1 2019. Investment activities witnessed a sharper decline in the second quarter (Q2) versus the first (Q1), as investor sentiment remained muted due to a nationwide lockdown and a spike in Covid-19 cases in India. Further, in Q2 2020, investments plummeted by almost 60% year-on-year (YoY) compared to a 25% decline in Q1 2020.
A clear cutback on the number of large-ticket investment deals contributed to the low investment momentum, especially in banking, financial services and insurance (BFSI) and real estate sectors. The number of large deals, greater than $100 million, reduced to about 30 compared to 55 during the same period last year.
While consumer technology, Software as a Service (SaaS), and BFSI dominated H1 2020 contributing about 55% of the total investments, the healthcare sector ballooned and had the highest growth. Within consumer technology—ed-tech (educational technology), vertical e-commerce, and food-tech (food technology) received most investor interest, driven by the growing demand for at-home services. For example, consumer technology giants—BYJU’s, Swiggy, Zomato and FirstCry cumulatively raised about $1 billion or approximately 8% of the total H1 investments.
Investments in SaaS grew due to the need for digitization and business process automation, across firms. The sector picked up multiple large deals of more than $100 million in H1 2020, led by Postman (a collaboration platform for API development) and HighRadius (a treasury management solution provider).
Within BFSI, non-banking financial companies (NBFCs) attracted most investments, especially in Q1 2020, as traditional sources of capital like bank lending were constrained due to tight liquidity conditions. IndoStar Capital Finance, Hero FinCorp and DMI Finance raised the largest investments in the space.
Healthcare as a segment, leaped in H1 with about 50% YoY investment uptick compared to an overall decline of 40%. Drug manufacturing companies sought maximum investor interest, amidst a growing competitiveness of Indian drug manufacturers versus China. Piramal, SeQuent Scientific and Intas Pharmaceuticals—each raised over $100 million investments in H1 2020.
The top 15 deals accounted for about 35% of the total investments in H1 2020. Apart from the aforementioned sectors, the Indian energy sector garnered large-ticket investments, with 3 of the top 15 deals occurring in this space. These investments included solar asset purchases from ACME Cleantech Solutions and SP Infra, and the setting-up of O2 Power, a renewable energy investment platform. In addition, distressed asset investments in RattanIndia Power and Uttam Galva Metallics also made it to the top 15 large-ticket deals.
VC investments however, remained unscathed as they maintained H1 2019 levels of about $4.3 billion. Consumer technology and SaaS continued to get the largest share of VC investments, with sizeable fundraises by BYJU’s, Swiggy, CureFit, Unacademy and Postman.
Exit momentum declined in H1 2020 in both volume and value terms, due to a weak equity market sentiment. The total value of exits declined by about 45% YoY to $3 billion in H1 2020, owing to a lower number of exit deals which fell 35% to 75 compared to the same period last year.
However, as businesses reopen, private equity (PE) and venture capital investments are expected to continue flowing into the country, with investors feeling confident about the long-term potential of the Indian economy, where they pumped in a record $45 billion across 1,000 plus deals in 2019.
The short-term outlook for the economy is clearly challenging. However, the fundamental drivers—infrastructure-led spending, basic demand from a large consumer base and headroom for growth, should propel the economy in the long run.
Going forward, investment activity is expected to rise in internet-based technology and healthcare, thrusted by a wider adoption of at-home services in education, e-commerce, and enterprise technology along with an increased focus on drug discovery and manufacturing. These investment themes have also played out in countries like China, who are past their Covid-19 peak periods.
Sriwatsan Krishnan and Aditya Shukla are Partners and Prabhav Kashyap is a Principal at Bain & Company. They are leaders in the firm’s Private Equity practice and have also authored the ‘India Private Equity Report 2020’ .
The views expressed are personal.
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