2022 emerged as the second-best year ever for PE/VC investments in India

The biggest impact on PE/VC investment activity emanated from the reduction in deal sizes with very few large deals closing, resulting in a 26% y-o-y decline in the total dollar value of PE/VC investments that fell to US$56.5 billion in 2022, primarily on account of the absence of very large PE buyouts (>US$500 million). The overall deal intensity, however, continued unabated, with the number of PE/VC deals remaining unchanged.

While some PE/VC investment trends continued from 2021 (like the dominance of startup investments and continued leadership of financial services, technology, and e-commerce as the preferred sectors for PE/VC investments), some new trends emerged due to the underlying macro environment such as the fall in size and number of large deals, rise of private credit, and increased PE/VC investments in infrastructure, real estate, and healthcare sectors.

According to EY’s recently launched, “PE/VC Agenda: India Trend Book 2023” some of the key trends that have emerged in 2022 are:

• Pure play PE/VC investments declined by 38% y-o-y (US$40.2 billion vs. US$65.2 billion in 2021). This was however offset to a small extent by the rebound in PE/VC investments in the infrastructure and real estate asset classes, which recorded a 52% y-o-y increase (US$16.3 billion vs. US$10.7 billion in 2021).
• 2022 has emerged as the best year for PE/VC credit investments in India, recording US$6.7 billion. Credit investments in 2022 were 158% higher than 2021 and 116% higher than the previous high recorded in 2019. Amid rising interest rates and the bid-ask spread between investors and seller valuations remaining high, credit has emerged as an opportunity for both private credit investors as well as asset owners to capture value, with many companies looking to raise bridge funding as an alternative to raising equity at less-than-optimal valuation levels.

• While the startup deal segment continued to be the largest, receiving US$18.6 billion in PE/VC investments, its total deal value vs. 2021 was down by 35%. This slowdown in startup investments has widely been termed as ‘funding winter’ for startups and has affected the fundraising plans of many companies, which have shifted their focus from growth to cash conservation / positive unit economics and are now deploying cost-cutting measures to reduce cash burn rates.
• In addition to global factors like inflation, rising interest rates and geopolitical conflicts, domestic factors like the poor performance of IPOs of recently listed new economy companies have also affected PE/VC sentiment — that till recently were seeing IPOs as a viable exit option.
• Technology and e-commerce, which were the favorite sectors in 2021, recorded US$6.1 billion and US$5.4 billion in PE/VC investments respectively, both recording over 60% decline y-o-y.
• Exits via sale to strategic players recorded a sharp fall in value of 63% on a y-o-y basis in the absence of large deals. In 2022, secondary exits recorded a 67% y-o-y decline in terms of value and 45% in terms of volume. As inflation and the cost of capital remains high, exit activity via secondary and strategic deals is expected to remain muted until the bid-ask spreads between sellers’ and buyers’ expectations narrow down.
• The number of PE-backed IPOs declined by 59% y-o-y and the corresponding exit value declined by 78%. Given the IPO experience of most listed startups, we expect startups to remain private for longer and in that process, an increase in secondary or strategic deals involving category leading startups.
• A high level of consolidation is already taking place with well-established startups acquiring their smaller and under-funded peers. Also, many large corporates will also look to acquire startups to augment their e-commerce and technology capabilities as valuations become more benign.