Role of Private Equity in the Indian Economy

The SEBI (Alternative Investment Funds - AIF) regulations were announced in 2012 to promote investment by institutions and individuals in new classes of assets like commercial real estate, commodities, SMEs, infrastructure, social ventures, intellectual property, distressed privately-held businesses, and in a variety of relatively less-regulated funds. Technically, any investment, such as a private equity fund, that looks beyond traditional assets like stocks, bonds, and cash is considered an AIF.

The buoyancy of India’s private equity ecosystem is driven by several factors such as a significant increase in the demographic with investable assets and the willingness to take higher risks in the hope of better returns. Obviously, it is not possible for the stock market to deliver such ROI within its remit. India’s consuming classes have a hunger for instant gratification, and this has spawned app-based consumer services and a growing startup circuit.

Private equity (PE) firms in India have opened up a new window for raising funds badly needed to inject money into not just cash-strapped startups and medium enterprises but also into meaningful social ventures. Besides, the country faces a $1.5 trillion+ gap in infrastructure funding for the period 2016-2026, money that is required to develop world-class roads, railways, seaports, airports, power, and telecom. It takes private equities and other AIFs to fill all of that shortfall. Private equity investments in India stood at $35.8 billion in 2018.

PEs play an increasing role in supplementing public sector investments in infrastructure expansion in both tier-1 and 2 cities, thus helping fuel India’s ascension in the global economic order. Many PEs invest in civil construction projects, tollways, BOTs, commercial buildings, real estate and renting firms, and land banking entities engaged in aggregating parcels of land for future development and/or sale. Successful PE funds are known to stage well-timed exits to reap high profits. Increasingly, many PE funds prefer to take a controlling stake, rather than a minority stake in the companies they invest in, so they can chart their own exit route independent of the promoter. Such “control deals” reached a critical mass of $9.9 billion in 2018, according to EY India.    

Privately-held growth-capital funds are also routinely infused into startups to overcome their dire need for seed-stage or follow-on funding. Promising up-and-coming businesses are shortlisted for funding based on their potential to disrupt existing business models and generate appreciable returns in the shorter term. Many of these are sector-agnostic funds and are responsible for driving rapid growth across sectors like manufacturing, infrastructure, IT/ITeS, education, financial services, consumer, and retail. By doing so, PEs spark market demand, create new jobs where there were none, and add to GDP growth.

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Created on Aug 6th 2019 02:47. Viewed 347 times.

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