Private Equity

Moving away from the virus’ impact: Indian PEs/VCs explore new directions

Indian companies are evolving as the coronavirus pandemic creates new challenges, but also new opportunities for early investors.

Following India’s Finance Minister Nirmala Sitharaman’s announcement to allow domestic companies to list overseas without requiring them to go public in Bombay, the change is expected to reward private equity investors for their patience, injecting much needed optimism for Indian companies struggling to raise capital domestically.

"It is a silver lining for India," Anand Prasanna, managing partner of Iron Pillar Fund told FinanceAsia. The group’s Indian growth portfolio recently received an additional $45 million cash injection, two years after the fund launched with $90 million.

Iron Pillar’s capital raising success, including three global institutions such as 57 Stars LLC, double downs on its existing portfolios with high conviction exposure to startups that provides software-as-a-service (SaaS) technology to corporates. Fund I spawned eight investments and one exit from SaaS company Now Floats, which was acquired by Reliance Jio in December 2019.

Evolving Technology Focus

Indian private equity and venture capital investments are expected to decline as much as 60% this year due to the coronavirus, according to a report released by Ernst & Young India. According to data on Tracxn, startup funding fell more than 80% to $330 million in March 2020, compared to $1.73 billion in March 2019.

The Covid-19 crisis is pushing investors towards starts-up with generally defensive business models that have thrived because of the virus pandemic, preferring SaaS and other B2B services, since they rely on fewer retail customers.

The current investment picture falls opposite to the themes a year ago. According to a report from Bain, about 80% of VC investments in 2019 were concentrated in four sectors: consumer tech, software/SaaS, fintech, and B2B commerce. Consumer tech was the largest sector, accounting for around 35% of total investments, with several scale deals exceeding $150 million in 2019.

But with more people at home and not spending, consumer tech has fallen out of favor with investors. The rise of social distancing and working from home pushes demand for cloud services, while traditional IT services such as software development and hardware maintenance, falls. Research firm IDC expects worldwide IT spending to decline by 2.7% in 2020. Prasanna attributes this to a greater allocation of funding towards cloud and SaaS companies.

The pandemic and liquidity crunch drives investors towards prioritizing rationale growth rather than rapid market share gains. In addition to strong balance sheets and cashflow visibility, investors want companies that can allocate capital and resources towards diversifying the business while also remaining solvent.

The Indian technology startup ecosystem has grown and changed dramatically in the last five years. From only six tech Unicorns with minimal returns to investors in 2015, India now has 38 tech unicorns with a cumulative enterprise value of over $180 billion. Investors have been rewarded, with more than $35 billion returning to their hands.

Iron Pillar is looking to finish investing from Fund I this year as capital raising for the group’s second Fund winds down. "We do see a lot of opportunities while M&A will also continue. The opportunity is much larger than the capital availability out there," Prasanna added.

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