In McKinsey’s 2015 report, Indian private equity: Route to resurgence, the authors analyzed the performance of the private equity industry in India and its impact on the Indian economy. At that time, the industry was at a crossroads, and the authors highlighted the challenges it faced and identified some “green shoots” that indicated a possible revival. In the aftermath of the global financial crisis, fund managers were forced to reevaluate their playbooks and tool kits; the changes they made prepared them for the next phase of growth.
Since then, the volume of private equity activity—fund-raising, investment, and exits—has indeed grown, helped by global liquidity and the inability of other domestic sources of capital to keep pace with a growing economy (Exhibit 1). In another good sign, the industry has seen a greater range of participants and a wider spectrum of deal types and investment strategies.
Other indicators are more mixed. Growth has been strong but heavily concentrated. Deals greater than $100 million are the only category that grew in the past three years (Exhibit 2). And these larger deals have, up until now, earned lower returns than smaller deals have.
Firms are learning from experience and shifting into buyouts, an area in which they have more influence over their investments. They are also choosing to focus on sectors with sound macroeconomics and more liquidity. But with the influx of new participants, the industry has become more crowded. The number of investors and new funds grew in 2015 and 2016, while deal count fell (before rebounding in 2017).
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Now a rebounding industry enters a new phase. Five emerging discontinuities have the potential to alter competition and behavior:
- a flood of capital as global limited partners (LPs) increase allocation to private equity and local sources of capital are accessed
- heightened competition, including from direct-investment teams of LPs
- a new pool of restructuring opportunities as banks unwind stressed loan portfolios
- a new generation of business owners and professional managers that is more open to alternative investments and partnership models with private equity funds
- the emergence and adoption of impact investing strategies
How private equity firms adapt to these discontinuities could differentiate winners from also-rans. In this evolving environment marked by more capital, a wider range of opportunity and deal types, heightened competition, and a redefinition of traditional relationships and alignments, private equity firms that can deliver consistent performance at scale could capitalize on an outsize opportunity. While shifting gears may be difficult, we see an expanding role for private equity as India strives for greater globalization, efficiency, and economic development.
Download Indian private equity: Coming of age, the full report on which this article is based (PDF–940KB).