The private equity and venture capital investments continued to grow at breakneck pace in January 2022, with a year-to-year growth of three times. This show of confidence by PE-VC industry is quite significant, coming in an environment of rising complexities and uncertainties. It indicates the underlying strengths of the rising entrepreneurial ecosystem in India and the deepening symbiotic relationship between entrepreneurs and PE-VC investors.
This decade is going to be a decade of rapid changes in world economy and order. The first critical element is the direction change in the Treasury yields of developed market. It was in September 1981 when the USA 10-year government bond reached an all-time high of 15.82 percent and since then it continued to decline for almost forty years. This is expected to reverse and give way to an environment of increasing interest rates and relatively higher inflation, which in turn will put pressure on both bond and equity prices forcing investors to look at alternative avenues to generate reasonable returns on their risk capital.
PE-VC investments fit the bill and it is likely to attract more and more investor interest going forward. The average portfolio weightage to PE-VC investment is about 20 percent and this decade is likely to see this increasing to a level of 33 percent.
The second important phenomenon is unabated rise of Asian economies which in this decade are likely to cross the critical thresholds. China is most likely to surpass USA to become the largest economy of the world, while India should also emerge as the third-largest economy of the world.
The risk capital of investors naturally finds their way to the most attractive growth stories and therefore the investment allocation to Asian economies is expected to increase multi-fold over next 7-8 years.
Both these forces, i.e., increasing allocation to PE-VC investments as well as fast growing and strong Asian economies like India, will ensure that the capital availability doesn’t remain a challenge for Indian entrepreneurs. The early signs have been quite positive.
The India focused PE-VC funds raised over $3 billion in 2020 and topped it up to over $7.5 billion in 2021. In January 2022 alone, they raised about $3 billion covering more than 40 percent of the fund raise of 2021. This is an extremely good news from timing perspective as well. India is at the cusp of an entrepreneurship revolution.
The economic survey of 2022 has indicated a sharp increase in number of start-ups from 733 in 2016-17 to a whopping 14,000 in 2021-22. It’s now the third-largest start up ecosystem in the world and the most critical point was presence of at least one start-up in 555 districts of India. It is no more a phenomenon of tier 1 cities but has spread its wings much wider.
Given the symbiotic relationship between entrepreneurs and PE-VC investors, availability of capital pool will result in higher success rate of startups, which in turn will result in higher fundraise by PE-VC firms resulting in even higher investments in Indian start-ups creating a powerful virtuous cycle. Therefore, the current spate of growth in PE-VC investments are likely to continue and by the end of decade, the annual investments by PE-VC industry may surpass $25 billion.
It will have a profound impact on Indian economy and business. One of the most critical areas where the partnership between entrepreneurs and investors work is increase in labour and capital productivity.
In the global rankings of labour and capital productivity, India still appears in the lower half and there lies not only one of the biggest opportunities but also this is an area where PE-VC industry can play a very constructive role. Another area is development of futuristic technologies. The risk taking and risk managing ability of PE-VC industry ensures that they continue to put significant amount of capital into potentially disruptive technologies and business models.
The rise of fintech and ecommerce in India has been fuelled by PE-VC firms and going forward, the same story will most likely be repeated in electrical vehicles, clean energy, defence and space technologies. The PE-VC firms have already started to invest aggressively in the electric vehicle segment. The yearly investments in this sector have already crossed $400 million and overall, more than $1.2 billon has already been put to work. It is expected to increase rapidly from here on as well, crossing $1 billion over next 3 to 4 years.
The rise of entrepreneurship in India has just begun and even though the start has been excellent, there is a long way to go. This will be accelerated and fuelled by the PE-VC investors who will continue to play the critical role of catalysts. The decade of 2020s is likely to be the best decade for Indian entrepreneurs and we can expect to witness the rise of a multiple global enterprises from India.
(Mohit Ralhan, Managing Partner, TIW Capital Group. Views are personal)
