Foreign private capital still betting on India

India’s share of the total allocation of global private equity capital has increased to 6% from 4% about five years ago, and senior industry executives said this could rise further in the next few years as investors look for pockets of growth.

This contrasts with the domestic public markets, which have seen foreign portfolio investors pull out a record ₹2 trillion in the first half of the year.

“Inflow of private capital has seen a steady rise over the year, and I expect the trend to continue,” said Bharatt Banka, senior private equity professional and former CEO of Aditya Birla Private Equity. “That said, the momentum of inflows should rise, given the overall sturdiness of the Indian economy despite near-term headwinds.”

The ability of the Indian market to absorb large inflows of capital has also increased, Banka added.

In 2021, India saw private equity (PE) and venture capital (VC) inflows surge to a record $70 billion, riding on increasing deal-making. “While last year was indeed a record one for the Indian PE/VC industry in terms of both investment and exit activity, the short-term outlook is a bit unclear given the prevailing uncertainty around pace of tightening by the US Fed, commodity prices (especially oil) and fragility of global supply chains. In the medium term, we think the private capital inflows will go up barring some blips here or there,” said Vivek Soni, partner and national leader of private equity services at consulting firm EY.

“Typically, in the low interest rate environments, institutional investors tend to make a larger allocations towards emerging markets and in a rising interest rate regime, these tend to go down. We have seen some tightening by the Fed and there could be a lot more to come. There could be some impact of that in the short term,” Soni said. “However, in the medium to long term, the outlook for private capital inflows is good largely on account of its growth story and pre-eminent position in EMs.”

PE inflows in the first half of the year were at $28.76 billion from 1,049 deals against $65.46 billion from 2,114 deals in 2021, VCCircle data showed.

Along with India’s long-term prospects, industry executives said that factors like China’s crackdown on edtech startups and the sudden halt of capital to Russia from Western countries are likely to be critical factors in the immediate future.

“Stock market FII flows are volatile at the moment, but private capital investments are more sticky. And while rupee has depreciated, which may delay exits, investments may not really slow down, depending on the industry. There is enough dry powder chasing investments in India,” said Hari Buggana, chairman and managing director of InvAscent, the investment advisor of India Life Sciences Fund.

“Given the challenges in China, big private capital allocators are constrained in their ability to fill their allocations for this year. Doing due diligence in China is very difficult and overall, there is a lot of uncertainty over things such as lockdowns, policies. So that capital earmarked for China will have to find its way to other Asian economies, including India,” said Buggana.

“Flows are also a function of industry. While tech may be out of favour, there are a bunch of industries that are doing well due to domestic demand, and these are attracting capital. Pharma and healthcare continue to be perennial favourites,” he added.

First article