India PE-VC dealmaking is expected to remain tempered in 2024, compared to the 2021-2022 scenario, amid global macroeconomic stabilization. However, robust fundamentals make the Indian outlook positive, according to the India Private Equity Report 2024 launched on Thursday by Bain & Company in collaboration with IVCA, the industry body for alternate capital in India.
The report noted that capital deployment in India will remain cautious this year as global macro conditions rebound from sluggish GDP growth globally (real GDP growth expected to be 3.1 per cent in 2024, similar to 2023), elevated interest rates likely to continue till H1 2024 by major central banks leading to lower availability and increased cost of leverage, and continued geopolitical conflicts in Middle East and US-China tensions that could result in commodity price spikes and trade disruptions.
“While the long-term outlook for India remains strong, we nonetheless expect that 2024 will see deal activity somewhat subdued compared to 2021/H1’22 due to elevated interest rates, continued geopolitical uncertainty and sluggish GDP growth – notably in end-markets such as Europe and the US. This is furthermore reflected in funds having been more differentially focused on existing portfolio management as compared to previous years,” Gustaf Ericson, Associate Partner, Bain & Company and co-author of the report told FE Aspire.
Robust macroeconomic fundamentals
The report maintained that India will benefit from outsized capital allocation driven by robust macroeconomic fundamentals such as India is expected to be the fastest-growing major economy in 2024 with 6.5 per cent growth versus 4.1 per cent for emerging markets, leading to possible higher capital deployment.
Moreover, a stable economic landscape with fiscal and monetary policy discipline is also expected to drive investments in India as the government is targeting a fiscal deficit reduction to 4.5 per cent while the Reserve Bank of India is targeting inflation below 4 per cent.
In addition, supportive government policies are likely to aid economic activity and attract investments, particularly in pharma, manufacturing, and renewable energy. Key enablers include production-linked incentives, tax incentives, import duties, and export promotion schemes, the report explained.
The report also highlighted that the China+1 strategy is expected to benefit Indian manufacturers with proven international capabilities in select sectors, such as electronics, pharma (APIs & CDMOs), and chemicals.
Gen AI in focus
In 2024, Generative AI will increasingly be on top of mind for funds in India across portfolio value creation, diligence, and fund operations, though it remains at a nascent stage. According to the report, 30–40 per cent of potential productivity benefits from Gen AI are likely in portfolio companies in key sectors such as BFSI, IT, and functions like software development, customer-facing roles, support roles (legal, IT, etc.)
India’s PE-VC deal activity in 2023 mirrored global trends with investment value dropping around 35 per cent year-over-year from around $62 billion in 2022 to around $39 billion in 2023, falling to pre-Covid-19 levels. This decline continued from H2 2022, driven by weaker macro sentiment, rising interest rates, and buyer-seller valuation mismatches.
However, PE investments displayed comparative resilience, with a 20 per cent decline in comparison to VC activity. VC activity experienced a significant approximately 60 per cent decline due to cautious investment sentiment among VC investors, who are now prioritizing business model profitability, the report added.
Soaring Exit Venue
Despite the slowdown in dealmaking, 2023 was a marquee year for Indian exits as the exit value soared by around 15 per cent to around $29 billion, accompanied by a rise in exit volume from around 210 to around 340 exits.
“Amidst subdued deal activity, exits in Indian PE-VC markets stood out prominently in 2023, driven by public market sales which surged to a record around $15B. This was led by the increasing depth of India’s public markets – which have been supported by significant domestic demand from both institutional and retail investors,” Ericson added.