Mumbai: Dry powder, or the collective pile of investible capital available with private investors, in India is at about $40 billion, according to an analysis by audit and consulting firm EY. The estimate considers capital available with India-based private equity and venture capital funds, global and Asia-focused funds with an India allocation, and sovereign and pension funds, as well as large tech investors such as Naspers.
The estimates further note that Indian private equity fund managers and non-Indian fund managers with India-focused funds have $9-10 billion of dry powder that has to be deployed in India. This is a historical high. According to an earlier article in Mint, the dry-powder was at a six year high of $7.1 billion last year.
Such record levels of dry powder and aggregate capital raised in the Indian market suggest an improvement in the fundraising environment, and reflect growing interest of limited partners in the India story. Limited partners are investors in private equity or venture capital funds. Abundant capital also means that deal-making becomes more difficult and competitive.
“We are slightly behind our capital allocation schedule. This is primarily due to pricing issues, especially given the public markets comps. Also, in certain sectors, we do have a dynamic of too much private capital chasing few good opportunities," said Sameer Sain, co-founder and CEO, Everstone Group.
This large amount of dry powder has different implications for different types of PE funds. Domestic fund managers with large assets under management and co-investment pools can compete effectively for buyout deals with the Asian and Global Funds.
“While it is made out like that there is too much capital available for private markets, it is not necessarily present across all segments and styles. In terms of style, I believe that venture and late-stage, large-ticket private equity is getting crowded. In terms of sectors, consumer and financial services are the popular segments right now, but there is not much capital available for infrastructure, real estate or distressed turnaround situations," added Sain. “When I say distressed, I don’t mean the top few commodity-linked NCLT cases, but for the others lower down the pecking order, such as manufacturing-type businesses, which require operational work. For them, there are hardly any takers."
However, there is a clear trend that buyouts are on the rise. “The $100 million-plus buyouts have become a lot more competitive as the number of PE funds (Indian plus foreign) that want to do these deals has increased faster than the number of investible targets," said Vivek Soni, partner - transaction advisory services and private equity advisory leader, EY. And, such trends reaffirm that capital itself just can’t be a differentiator, anymore. “It now requires a fundamental shift in how private equity funds will implement their business strategy and manage capital," said a fund manager.
Fund managers have now picked up their niches and styles, and are adopting a more focused approach. Therefore, high levels of dry powder is a huge enabler. “This high level of dry powder gives a clear visible runway for investing over the next 3-4 years to Indian GPs. This, coupled with significant increase in AUM by Indian PE firms that are now more than three funds old, has enabled them to attract and retain investing/operational talent on the back of absolute increase in management fee pools. All this has helped them compete and perform more effectively," added Soni.
But while there has been a deluge of capital, the meltdown in public markets have turned events. “The recent meltdown in the market has resulted in a window of opportunity. Conversations are beginning to happen for those companies who were earlier thinking of approaching the capital markets for IPOs. So, for sure, those promoters who were mulling an IPO are having to rethink and are increasingly approaching us. There is a wait and watch situation now," said Sain.