India’s consumer Internet start-ups on PE radar

The entry of private equity investors, whether now or 6-8 months later, can only play out favourably for mature consumer Internet start-ups

Are private equity (PE) investors finally warming up to India’s consumer Internet start-ups?

On Monday, Mint reported that TPG Growth, the middle market and growth equity investment arm of San Francisco-based private equity giant TPG, is scoping out the consumer Internet market. After testing waters in June last year with an investment in eyewear e-tailer Lenskart, the firm now wants to grow its portfolio. One way it plans to do that is target venture capital-backed companies that are in the market for later-stage funds.

TPG is no stranger to India. The firm has been investing here for over a decade (it initially invested here through Newbridge Capital, a joint venture with Blum Capital and ACON Investments). It currently invests in large buyout opportunities through TPG Capital and in growth businesses through TPG Growth. The latter raised a $3 billion global fund in April last year, and a fair chunk of that corpus is expected to flow into India.

The firm’s plans to expand its presence in the consumer Internet sector here couldn’t be better timed. The market currently offers growth investors, such as TPG Growth, a window of opportunity to pick up stakes in some of the choicest consumer Internet assets. Hedge funds are no longer as active as they used to be. There are a number of strategic investors in play, such as Japan’s SoftBank Group and China’s Alibaba Group Holding Ltd, but not nearly enough to absorb the demand for growth capital that has built up over the last couple of years.

The absence of hedge funds in particular has also relieved the pressure on valuations. Valuations are already down 25-30% compared to early 2015 levels and are expected to decline further. It may be another 6-8 months before valuations settle to levels that are palatable for private equity investors. However, the conversations that may eventually lead to deals have started to take place.

TPG Growth’s interest isn’t an isolated development either. Warburg Pincus Llc, the New York-based private equity firm with $55 billion in funds under management, has been investing sporadically in the sector for a while. In 2012, it led a $32 million funding round in online classifieds platform Quikr India Pvt. Ltd, one of India’s technology unicorns (start-ups valued privately at a billion dollars or more). In October 2014, it led a $30 million round in online auto classifieds platform Last June, it invested about $133 million in logistics solutions company Ecom Express Pvt. Ltd, which caters primarily to e-commerce companies.

Former ICICI Venture chief Renuka Ramnath’s firm Multiples Alternate Asset Management Pvt. Ltd is also understood to be evaluating investments in the sector. The Mumbai-based firm hasn’t made any bets yet, barring e-commerce logistics solutions company Delhivery (SSN Logistics Pvt. Ltd), in which it led a reported $35 million round in September 2014. Last October, within a year of the investment, it sold a part of its stake, about 10%, to Tiger Global Management, the New York-based hedge fund that invests in start-ups here and elsewhere from its venture capital funds.

Last July, global investment firm Goldman Sachs Group Inc. debuted in the e-commerce sector when it led a $100 million funding round in furniture e-tailer Pepperfry.

Others may also jump on the bandwagon soon. Bengaluru-based WestBridge Capital Partners Llc, which invests primarily in public companies, has lately started to place bets on private ones. This week, it was among a group of investors that made an undisclosed Series C round investment in Indiamart, an online listings platform for small and medium businesses. Delhi-based ChrysCapital is also evaluating deals in the consumer Internet sector, though, given its conservative nature, it may wait longer than others.

The entry of private equity investors, the traditional source of growth capital for private companies, whether now or 6-8 months later, can only play out favourably for mature consumer Internet start-ups. A Flipkart or a Snapdeal may not need them, yet, but the second rung of players out there would be well served by patient investors who are less likely to turn tail at the first sign of trouble in the financial markets.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.