Just over two months into 2023, and the pangs of a global downturn are already visible in the Indian fundraising scene.
After committing record capital to India-focused private equity (PE) and venture capital (VC) firms in 2022, limited partners (LPs) have doled out only $830 million to investors during the first two months of this year amid macroeconomic headwinds.
According to data available with Venture Intelligence, PE and VC firms had amassed $1.2 billion from LPs during January-February last year and a whopping $10.5 billion during the whole of 2022.
The drop so far this year from the corresponding period last year, experts say, is ‘not all that drastic’, given that 2022’s figure was exceptionally high in terms of value compared with other years.
“India has been one of the world’s fastest-growing economies over the past two decades. Even over the past 18 months, the Indian economy has proven its resilience to the deteriorating external environment, growing faster than most developed and emerging markets,” said Ruchira Shukla, head for South Asia, disruptive technologies – direct equity and VC funds, at the International Finance Corporation (IFC).
The amount pumped in by LPs into PE and VC fund managers in India stood at $5 billion in 2021 and $5.4 billion in 2020, show the Venture Intelligence data.
In 2019, a year before the COVID crisis hit India, PE and VC firms raked in a little over $8.1 billion from fund of funds — that was a record before 2022.
LPs (also known as fund-of-funds) typically include endowments, pension funds, and other institutional investors that allocate capital to PE and VC firms (known as general partners or GPs) to make direct investments in companies. LPs also invest in companies directly, alongside GPs.
“Clearly, it [India] is in an enviable spot — the structural fundamentals have remained strong. It is a robust democracy, and it has been surprisingly resilient despite multiple shocks,” Chirantan Patnaik, Director, Venture Capital (Technology and Telecoms Equity Group) at British International Investment Plc (BII — formerly CDC Group) told DealStreetAsia in an earlier interview.
GPs who got lucky
Earlier this week, Nexus Venture Partners, which has backed prominent unicorns such as Delhivery and Unacademy in India, made headlines when it announced the closure of its seventh fund at $700 million to ramp up its early-stage investments in the technology sector in India.
However, it’s not technology alone. Experts say fundraising is expected to gain steam as innovations from India are increasingly finding relevance in global markets with businesses mushrooming in new-age sectors such as health tech, climate tech, agritech, job tech, and digital supply chains.
Over the past few years, startup founders have matured and are increasingly taking a long-term view with greater cash burn discipline, said IFC’s Shukla. “Boards are putting in place the checks and balances needed for strong governance. With these positive shifts in play, global LPs are turning to India as a market that will create robust businesses and deliver profitable, long-term growth, she added.
Other PE and VC investors that have raised large amounts of capital include prominent names such as Kotak Investment Advisors, Lok Capital, PeerCapital, and Z3 Partners.
However, the key question remains as to how long it will finally take LPs to deploy the amount that they have committed to PE and VC firms.
Typically, fund closure is all about garnering commitments with some portion, say a 10% drawn down upfront. And then deal by deal basis.
“Given that PE and VC firms are suddenly going slow towards fresh investments now, LPs could take longer to actually allocate the amount they have committed,” said Pratip Mazumdar, co-founder & partner at sector-agnostic technology-focused fund Inflexor Ventures.
“While the developed world is already experiencing a bit of a slowdown, India is still acting as the flag bearer of growth. Keeping that in mind, the inflow of capital should not be a problem,” he added.
Top foreign LPs in India include prominent names such as BII, Lightsource BP, Mizuho Bank, StepStone Capital, Temasek, FMO, and IFC, among others. Meanwhile, domestic players such as National Investment and Infrastructure Fund (NIIF), too, parked quite a significant sum with risk capital investors in the past few years.