Private equity (PE) and venture capital (VC) firms in India raised more funds in the first three quarters of this year, than in each of the last five years, mainly because sinking bond yields left investors hunting for alternatives.
Between January-September alone, 28 PE/VC firms raised $6.2 billion, compared to $5.4 billion raised by 43 firms in last full year, according to financial market data provider Refinitiv. It was also the highest amount of funds raised in each of the past five years, indicating increasing investor interest in Indian alternative investment funds.
“The quest for better risk-adjusted returns in a globally declining interest rate scenario is one of the key factors contributing to the increase in PE/VC fundraising. That is also coupled with India’s long-term growth trajectory compared to rest of the world, as despite a recent slowdown it remains a compelling investment destination," said Shagoofa Rashid Khan, partner at Cyril Amarchand Mangaldas.
Sluggish global growth, monetary easing and rising uncertainties over an ongoing US-China trade war sent the stock of negative-yielding debt across the world to over $17 trillion, according to a 30 August Bloomberg report. Thirty percent of all investment-grade securities bore sub-zero yields, the report said. This meant that debt market investors, including global pension funds, sovereign wealth funds, traders and investment funds, would bear losses even if they held their debt to maturity.
“Global fund managers and pension funds are allocating capital to emerging markets’ PE and growth strategies. New set of investors, including AustralianSuper and Korean sovereign funds are also entering the market, alongside Canadian investors who have been investing heavily in India over the last five years," said Khan.
Besides global factors, PE/VC funds in the country are also benefitting from India’s pace of economic growth. “As far as Indian private equity is concerned, I believe that we have a $100 billion market in the making. Therefore, the broad trend is that as India moves towards becoming a $5 trillion economy, we will see Indian private equity becoming a mainstream asset class for global investors. Also, as the size of Indian PE market grows, the size of segment comprising India-specific funds will also grow in line," said Gopal Jain, managing partner of Gaja Capital.
Further, the momentum in fundraising is also supported by domestic investors who are also investing much more in Indian alternative assets than earlier. “Domestic institutions and family offices, encouraged by the increase in domestic deal making and emergence of new homegrown funds, are willing to put in more capital than ever before, giving the foreign LPs confidence to follow-on," said Gopal Srinivasan, managing director and chairman, TVS Capital Funds.
While the amount raised by PE/VC firms grew as of September, the number of firms that raised funds were lesser compared to the previous year.
More than a third of the fundraising amount this year was contributed by Indian sovereign wealth fund— National Investment and Infrastructure Fund (NIIF), which alone got commitments of about $2 billion from AustralianSuper, Australia’s largest superannuation and pension fund, and Ontario Teachers’ Pension Plan (Ontario Teachers’), one of Canada’s largest single-profession pension plans.
The fundraising, according to Khan, has also increased after the implementation of the Insolvency and Bankruptcy Code (IBC) in India. “Post IBC, funds are being raised with focus on investment opportunities in special situations (stressed, distressed and rescue financing) which has also increased the momentum in fund raising," she said.
The other two funds to raise the highest this year were in the distressed assets space. One, Edelweiss Financial Services Ltd.’s distressed assets focused fund EISAF II that raised a corpus of $1.3 billion, and Kotak Special Situations Fund, which closed with total commitments of $1 billion.
“There is an increase in investments flowing into credit, infrastructure and real estate-focused funds, which because of their large deal sizes are bigger in terms of volume compared to the other PE/VC funds," said Srini Sriniwasan, managing director and chief executive officer of Kotak Investment Advisors Ltd.
“It is pretty widely known that we have a credit crisis in India and therefore, anybody who has surplus capital and is willing to make risk-adjusted returns has an entire spectrum of possibilities available for getting decent returns. In that sense, credit funds have seen good traction as they feed into different risk appetites of investors and that could go up further if the government irons out some key issues in the Insolvency code," said Sriniwasan.