Start-up and IT exits among private equity (PE) and venture capital (VC) investors in 2022 have slowed down significantly due to bearish sentiment in public markets coupled with the younger portfolios of top funds witnessing lower exits compared to pre-2021 stages.

According to a report by management consulting firm Bain & Company, this year’s exit activity stood at just $5.9 billion so far, which is a 56% decline over the last year’s activity over a similar duration. In CY2021, exits grew by  4X to $36 billion.

The exit activity is expected to weaken further in 2022 even as the pace of deals has been slowing down. However, large PE and VC funds continue to keep pace with their funding activity over the last year, indicating confidence in the fundamentals of the Indian market, the report said. 

In CY2021, exits of more than $100 million nearly tripled in volumes and grew by 69% in size, as all sectors witnessed an acceleration in exits and exit value. Strategic sale continues to be the most dominant route of exit, with almost 50% of all exits over the last few years. Secondary sales and strategic sales are becoming the most preferred exit routes, expanding by 28% and 23% respectively each year, over the last three years, according to Bain and Company. Public markets are also showing an appetite for large exits, with an average size of exit reaching $266 million, at a CAGR of 95% since 2019.

PE and VC Funds are also directing more capital towards buyouts with an increased preference for buyout deals with larger cheques. 2021 witnessed an upsurge in buyouts deal value by 5x in as many years to reach $16  billion. Buyouts contributed more than 50% of the share of PE investments, growing from 25% in 2016.  Traditional funds like Blackstone, Baring, Carlyle, Advent, GIC, and KKR have invested more than $1  billion each in buyouts over the last three years, with their outlay increasing over years.  

Another finding of the report looks at how competition within funds and increased participation of limited partners (LPs) are driving up valuations and making deal sourcing and faster execution increasingly critical. Funds are shifting their strategy to adapt to these changes by expanding cheque sizes, investing in deeper target relationships, and increasing value-creation capabilities, especially by setting up portfolio teams. 

“The Indian market has been attracting more investors over years, creating a  balancing loop of return potential, and differentiated fund strategies are likely to emerge as funds work towards finding niche opportunities for superlative returns,” the report added.

Nevertheless, in the first half of CY2022, more than $24 billion of PE-VC  investments across 630 deals were recorded in May 2022 compared to 775 deals for $19 billion in value in May 2021. However, VC and growth equity deals have slowed significantly, with 20%  lesser deals this year compared to last year’s run rate of 130 deals every month.

Average VC cheque sizes have also declined, and consumer tech activity is the hardest hit by this slowdown. Private equity however has maintained strength, the report added. 

Overall, the Indian and VC deals landscape reached new heights in 2021 with investments reaching $70 billion and deal volume (number of deals) increasing by 87% over 2020. However, after a heightened year for both deal activity and exits, CY2022 is expected to witness a tapering in the pace of activity as the gains of last year are consolidated. 

Coupled with the flight of capital away from China due to political uncertainties, the growth helped India increase its share of the overall Asia-Pacific (APAC)  market, a trend expected to continue according to the report. 

Arpan Sheth, Partner, Bain & Company said that in 2021, the Indian private equity ecosystem bounced back from 2020’s Covid-driven restraints, growing faster than most major economies, including China, with 96% growth over 2020.

“This year, we anticipate a  significant tempering of pace in investment activity as macro and micro trends converge, but see this as  an opportunity for the consolidation of last year’s gains, which should make India witness annual PE VC deal values of around $50 billion more frequently. India should seek to consolidate its position as the market of choice for investors as the investment and exit landscape demonstrates maturity,” Sheth added.