India Inc. deal sentiment upbeat in H1

Investment in India is growing

India recorded investments worth USD 34.1 billion across 714 deals, including 92 large deals worth USD 23.7 billion in PE / VC roundup in H 1 (the first half of calendar year) 2022. In terms of number of deals, it was a 37 per cent YoY (year-over-year) jump Notwithstanding the challenges emanating geo-political reasons and inflation, India is likely to be the fastest growing economy in the world and this optimism has been vouched in various quarters. While there could be revisions by rating agencies and major institutions on the growth front as situations and sentiments change from time-to-time, the India story still remains strong.
Since the Coronavirus pandemic hit the country in March-April 2020, the government has increased its spending on welfare schemes and infrastructure to keep the growth momentum going. But now when the worst is behind us, the country is looking at private investments from domestic industry and abroad.
The economies across the world are facing challenging times and there is no easy capital available now. The investors are careful in loosening their purse strings. But, India remains a market with potential and promise, and there is unlikely to be a dearth of capital if no other major shock emerges, going ahead.
We are into the eighth month in 2022 and the first six months or H1 tells a story that boosts confidence.
India recorded investments worth USD 34.1 billion across 714 deals, including 92 large deals worth USD 23.7 billion in PE / VC roundup in H-1 2022 according to the IVCA-EY monthly report. In terms of number of deals, H-1 2002 recorded an increase of 37 per cent YoY. This report said that the investments recorder over the past six months were 28 per cent higher year-on-year in value terms but were down 32 per cent sequentially at USD 50.4 billion in H-2 of 2021.

While we could give too much importance to the sequential decline in PE / VC investments, we must not discredit the fact that two major events unfolded during this period. One was the Russia-Ukraine conflict and the other was the interest rate hikes undertaken by several central banks across the globe including the US Federal Reserve. The Reserve Bank of India (RBI) also, in May, in an unscheduled Monetary Policy Committee meeting, raised the repo rate by 40 basis points.

Inflation started to raise its head much before the conflict broke out between Russia and Ukraine; it only accentuated the inflation growth. From September 2021, major economies began tightening or withdrawing access liquidity from the system to tame inflation. With the war, the situation only got worsened forcing central banks to take extraordinary measures. So, the period of easy money is over since a while.

The cost of capital is expected to rise, so we would see largely meatier deals getting through. And even that is not a bad thing. Start-ups will now have to work hard on their business plans to impress investors.
Investment and outlook
The biggest beneficiary of the PE / VC investment was the financial services sector which received the largest funding at USD 7.3 billion during the first half of CY 2022. It was followed by e-commerce and technology sectors which received around USD 4 billion in PE / VC investments. Some other sectors which saw good traction included media & entertainment, logistics and education recording a 2-3 time increase in investments.
As for start-up investments, H-1 2022 witnessed PE / VC funding worth USD 13.3 billion across 506 deals. This was a 54 per cent YoY jump from H-1 2021 at USD 8.6 billion across 327 deals. The growth investments stood at USD 11.4 billion across 106 deals, which was a 41 per cent YoY increase from USD 8.1 billion across 95 deals in the first half of 2021.
Credit investments grew over three-fold to USD 3.1 billion across 46 deals in H-1 22 while PIPE deals recorded USD 2 billion across 31 deals from USD1.2 billion across 30 deals in H-1 21. The IVCA-EY monthly report, which was published on 22th of July further said quoting Vivek Soni, Partner and National Leader, Private Equity Services, EY that India despite recording a sequential decline amid global headwinds of tightening liquidity and rising inflation, the PE/VC investment flow into the country had remained robust, maintaining a monthly average run-rate of USD 6 billion, which was in line with last year.
While India’s position as an attractive destination for PE / VC investments is expected to remain strong in 2022 given its high growth and macroeconomic and policy stability, the continuing geopolitical tensions, rising inflation, strengthening dollar, quantitative tightening by the US
FED, crude oil price spikes and fears of a global recession remain key downside risks, making
investors circumspect. We continue to remain ‘cautiously optimistic’ about 2022 PE/VC investments exceeding the 2021 record highs.
India’s infrastructure sector remained in the pink in 2022, with H-1 2022 recording USD 2.7 billion in investments and the report expects the trend to continue in the second half of the year. In a rising inflation environment infrastructure sector can provide a good hedge as returns from most infrastructure assets are inflation hedged, the report said.
Headwinds
While there are several tailwinds, not everything is hunky-dory. It is not to paint a gloomy picture but to be mindful of what challenges remain. The buoyant mood could take a beating if world’s two largest economies US and China gets into conflict over Taiwan, especially at these times when the going is already tough. We have already seen what high inflation and one war could do. The PE/VC funding despite remaining robust in first half of 2022 has seen a sequential setback.

Start-up deals have declined by a third compared to the second half of last year when start-up deals were at an all-time high. Buyouts investments were hit during H-1 22 at USD 4.3 billion across 25 deals. It was a 46 per cent YoY decline from USD 7.9 billion across 25 deals in H-1 21.
PE/VC exits are also a strong indicator of how the investors view the existing situation. An easy exit scenario inspires a lot of confidence among the investors. Exits were lower by more than 55 per cent both sequentially and on a y-o-y basis in the absence of large strategic and secondary deals, this report said. Exits worth USD 9.6 billion across 120 deals in H-1 2022 were recorded which included seven PE-backed IPOs with USD 423 million in exit proceeds.

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