The year 2021 saw India break all records for private equity (PE) investments and emerge as the world’s third-largest start-up ecosystem. However, expectations of witnessing a similar growth trajectory were shattered during the year 2022.
EY recently released a report titled “PE/VC Agenda: India Trend Book 2023”, which summarises the financial activity in the PE/VC domain that took place across sectors during 2022. The report highlights how, technology and e-commerce, which were the favourite sectors in 2021, recorded $6.1 billion and $5.4 billion in PE/venture capital (VC) investments respectively, registering over 60 per cent decline on a year-on-year basis.
The report sheds light on how expectations of similar growth rates in 2022-23 fell and things panned out differently. The emergence of multiple global headwinds such as the geopolitical conflict in Ukraine resulting in supply chain shocks, rising inflation and interest rate hikes by global central banks dampened global investor sentiment and roiled capital markets globally.
The biggest impact on PE/VC investment activity emanated from the reduction in deal sizes with very few large deals closing, resulting in a 26 per cent year-on-year decline in the total dollar value of PE/VC investments that fell to $56.5 billion in 2022, primarily on account of the absence of very large PE buyouts (>$500 million). The overall deal intensity, however, continued unabated, with the number of PE/VC deals remaining unchanged.
While some PE/VC investment trends continued from 2021 (like the dominance of start-up investments, and continued leadership of financial services, technology and e-commerce as the preferred sectors for PE/VC investments), some new trends emerged due to the underlying macro environment such as the fall in size and number of large deals, rise of private credit, and increased PE/VC investments in the infrastructure, real estate and healthcare sectors.
A look at the key findings of the report…
Sector-wise trends
The PE/VC investment activity in 2022 was dominated by five sectors – financial services, infrastructure, real estate, technology and e-commerce – that have accounted for almost two-thirds of the deal activity by value and volume, each recording over $5 billion in investments. While technology and e-commerce were the top two sectors in 2021, they dropped to the fourth and fifth spots respectively, with the infrastructure sector rising to the second spot just behind financial services.
The e-commerce and technology sectors, which had recorded all-time high investments in 2021, recorded 66 per cent and 62 per cent year-on-year decline in PE/VC investments in 2022 respectively. Further, the telecommunications sector witnessed a decline in PE/VC deals by value from $220 million in 2021 to $209 million in 2022. However, in terms of the number of deals, telecom witnessed an increase from two deals in 2021 to three deals in 2022.
Private credit makes significant inroads
2022 emerged as the best year for PE/VC backed private credit investments in India, recording $6.7 billion. Credit investments in 2022 were 158 per cent higher than 2021 and 116 per cent higher than the previous high recorded in 2019. Four sectors – financial services, real estate, infrastructure and e-commerce – accounted for almost 87 per cent of all credit investments in 2022.
In terms of value of deals, the top five sectors were infrastructure, real estate, financial services, e-commerce and telecommunications. In particular, the telecommunications sector recorded $194 million of private credit investment in 2022, up from almost zero in 2021.
Infrastructure sector regains prominence
With interest rates rising globally during 2022, steady yield generating real assets were seen as a hedge against inflationary forces, and investments in the infrastructure sector increased to $9 billion, a 67 per cent increase on a year-on-year basis. Unlike other sectors, the infrastructure sector saw an increase in large deals with 18 deals over $100 million compared to 15 such deals in 2021.
Technology sector records muted performance
The technology sector recorded all-time high PE/VC investments during 2021 at $16.2 billion, also the highest ever annual investment value for any sector till date. However, it recorded a sharp decline of 62 per cent in value terms during 2022, despite a 12 per cent increase in the number of deals, mainly due the absence of large buyouts.
Like 2021, IT/ITeS received the maximum PE/VC investments at $2.6 billion in 2022. Further, in recent years, software-as-a-service (SaaS) has emerged as one of the leading technology sub-sectors, recording the highest number of PE/VC deals (91) in 2022.
Future outlook
Despite the apparent overall decline in PE/VC investments during 2022, the deal momentum in the country has been relatively strong. Further, with all-time high India-dedicated fund raises witnessed in 2022 ($17.4 billion) amid a slowing global economy and the high level of dry powder available globally, the country’s PE/VC investment is expected to grow. This is a tremendous opportunity for PE/VC investors to act as agents of change and contribute to India’s growth as it moves towards becoming a $5 trillion economy.
