Mumbai: The Indian private equity (PE) industry has seen a significant shift between 2015 and 2017, with rising capital inflows, increased investment discipline, and rise in buyout and exit deals, according to a report by global consulting giant McKinsey and Co. Since 2003, PE firms have invested more than $97 billion in India, excluding real estate assets and venture capital, with more capital being deployed in 2017 than in any year since the global financial crisis, said the report, Indian private equity: Coming of age.

“Fundamentally, the nature of transactions have evolved quite a bit. Majority of transactions pre-2015 were minority. Buyouts was not a big thing and that has dramatically shifted over the last 3-4 years. People have realized the need for control, whether it is in terms of exit timing, management change or capex, and so there’s a significant amount going into buyouts with buyouts contributing to 25% of investments over the last 3 years," said Peeyush Dalmia, partner, McKinsey and Co.

With growth in buyouts, PE funds have also witnessed a change in their working style. “Because of large deals and buyouts, the kind of capabilities PE firms are building is very different from earlier. Earlier a lot of investments were potentially passive, or PIPE (public investment in private equity) in many cases. Now, it is significantly more operational in nature. Most fund houses have some form of an in-house operating team or full time advisors. People in fund houses are actually spending more than 30% of their time in operating work."

Dalmia added that buyouts will grow in numbers as more and more old economy assets go up for sale under the insolvency and bankruptcy code.

Deal sizes too have been going up significantly. From 2015 to 2017, more than three-quarters of the deal value was driven by transactions of over $100 million. A major reason for buyouts gaining traction is that they have delivered better returns for fund houses.

According to the report, buyouts earned the highest return, with median returns at 21% (see chart). The variance in returns was also higher for buyouts, indicating the inherent higher risk and the premium on effective execution.

“Funds would rather do larger and fewer deals and prefer to have control. Control gives the ability to change management. It helps you determine exit timing and it helps you guide where future capital gets invested," said Vivek Pandit, senior partner, McKinsey.

Median returns for deals in the sub-$25 million category were more than twice that of deals of $50 million or more, the report added.

According to Dalmia, the sub-$25 million deal space has generated good returns for a variety of reasons. “People were able to sight some assets very early in the cycle. Also, these investments were in specific sectors which were amenable to such deals, like IT services, financial services, etc., and not in troubled sectors such as infra or telecom."

Overall, the Indian PE industry has delivered good returns on exits, and the pace of exits have been growing significantly to $10.8 billion in 2017—a tenfold growth since 2009. In fact, 48% of all exits since 2003 (by value) took place in the past three years, the report said. Sales to strategic buyers accounted for almost one-third of exits (by value) from 2015 to 2017.

PE firms have shown a strong liking for the financial services sector, which accounted for over 90% of investment growth between 2012 and 2014, and 2015–2017.