Winning in India: a data-driven playbook to maximize PEVC returns

Abstract

India has been long touted as the growth engine for the better part of two decades. Given massively influential trends such as rapid urbanization, high gross domestic product (GDP) growth rates, and increased consumerism, there has been a great deal of interest in the Indian capital markets from all around the world. According to an Ernst & Young PE report, private equity (“PE”) investments in India reached an all-time high of $48 billion in 2019, with a CAGR of an increase of 28% on 2018. Given the volatility in the stock, bond market and uncertainty of financial regimes under the governments, PE has become an increasingly attractive alternative asset vehicle for high net worth individuals (HNIs) and institutional funds (pension funds, govt. Fund of funds, etc.,). The India Consumption story has brought in billions of dollars from all around the world to participate in the growth. While the Private Equity and Venture Capital (“PEVC”) industry has been undergoing a rapid evolution, there is limited research about the return levers and growth drivers for PE firms. Even with regards to sectoral performance, there is a lack of adequate understanding. The lack of quality data available in this regard has always made analysis of this industry harder. Thus, this report aims to fill this gap and understand the PE returns in the Indian context. Past research in India and abroad has stated multiple different factors for PE funds growth. The aim is to bridge all the gaps in knowledge by delving deep into the industry to create a data-driven “playbook” that can be used as a guidance for new investors in the country. The report aims to study the PEVC returns in the Indian context using the data sample from Jan-1998 to Sep-2020. This is done by the exploring industries and stages of investments that have generated maximum returns during this period. The literature has been surveyed in three broad categories, PEVC returns and comparison with public markets, key levers generating PEVC returns, and industry and stage wise performance of PEVC. There have been limited academic efforts to study returns produced by different industries of investment and the report is an academic effort to bridge that gap. More than 1,000 deals have been studied in 20+ industries. The report has analyzed the year-on-year (YoY) returns on these deals, and their difference with the Nifty and relevant sectoral returns during the holding period of such deals. In the study of returns across different industries, it was found that the top 25 percentile deals in all industries except Gems & Jewelry outperformed the public market equivalents. However, there have been multiple instances of underperformance in the deals in lower percentiles. On the basis of average return after adjusting for Nifty 50 returns, Education, Engineering & Construction, Shipping & Logistics, BFSI, IT & ITES, Agri-business, Healthcare & Life Sciences, and FMCG industries were above average performers within the sample during the period under consideration. In the study of returns across stages, it was found that buyout stage outperformed early, growth and late stage deals when compared to public market returns for the period and sample deals under consideration. In the study of returns across the regions, there is no clear trend. The top 25 percentile deals in all the regions have outperformed the public market returns. The central and eastern regions have underperformed the public markets in 50th percentile and 25th percentile deals. The study is based on the PEVC returns for the period from Jan-1998 to Sep-2020 and the trends may not be indicative of the future. Further, the report has taken sample deals from the Venture Intelligence PE deals database, and the authenticity and exhaustiveness of reported data has not been independently verified.