India's private equity boom: Insights and opportunities

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Abhinav Bharti: Hi, you're listening to What's The Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast. I'm your host, Abhinav Bharti, head of equity capital markets for India at J.P. Morgan. And today I'm joined by Nitin Maheshwari, our head of India M&A and APAC sponsors M&A business at J.P. Morgan. Together, we will discuss the private equity landscape in India, which has seen a significant evolution in the last few years to become a key market globally for sponsors. Nitin, thanks for joining me.

Nitin Maheshwari: Hey, thanks Abhinav, glad to be here.

Abhinav Bharti: Nitin, let me just kickstart the conversation here. India has become one of the most followed and active equity capital markets globally this year with record levels of issuances. The country is benefiting from a thriving economy and a booming startup sector. There's a high level of conviction among global investors, both institutional as well as private equity investors on the opportunity that India represents. In your view, what's driving the shift in the way global investors are viewing India?

Nitin Maheshwari: Yeah, absolutely. So I would say, three things which are really driving this investor interest both from public and private side, right? So one, naturally the big macro themes, which we've had the promise of for the last three decades, but finally started to come to fruition across big themes of consumption, digital transformation, government's focus on infrastructure and capital following that. And finally, we've always been the progress in the services side, but then the manufacturing shift. So I feel all of these are coming together all at the same time, which is creating quite an attractive macro thesis for investors. So that's point number one. Second, I would say that while this macro is quite interesting but are there deals to follow that macro and hence is the regulatory or the overall deal environment is available for investors to play with. So that availability of good quality deals is now making it quite attractive for both public and private investors. And all of that is driving into the third thesis, which is maturity of public and private markets for both investments as well as exits, which is an important piece. If you're looking to invest, you want to make sure you have a clear and visible exit path. And with majority of public and private markets, we're seeing that come together quite well.

Abhinav Bharti: Those are great points. And to move it forward, how do you think the private equity landscape in India has evolved over these last 5 to 10 years?

Nitin Maheshwari: Private equity obviously has been tracking India for a long time now. I would say every single large private equity shop has been in India for 15 to 20 year. Which means that they've done at least three to four investment and exit cycles, which gives all of them the experience and the confidence to continue to play in India. They obviously had their teething issues in the early 2004 to 2009 period, where each one of them was really more focused on doing minority deals, backing Indian entrepreneurs. I think what has changed really in deals that I've seen in last 10 to 15 years, sponsors have more conviction of leading and owning businesses in India. They found adequate talent to be, let's say, the CXOs and effectively giving them the power to control businesses. There were many family-owned businesses which were going through transition and they found an attractive path to partner with private equity investors to sell what they had to sell. And then as you reflect on the exit cycle, especially last five years, initially we thought, "Okay, private equity should be only selling to other private equity or to strategic buyers," but the maturity of public markets has really changed the game for private equity, where they're able to sell assets and large stakes in public markets. So that, I would say, has created a very interesting virtuous cycle for success of private equity firms in India.

Abhinav Bharti: I think if you really look at it, Nitin, it's not just that the number of investments and, of course, the number of financial sponsors who are now evaluating the market has increased over these years, but equally the size of the checks that they are writing, both in terms of absolute dollars being put at work. But more importantly, the kind of percentage stakes going all the way up to 100% control that we are seeing sponsors do that. Equally, if you were to look at it on the perspective of how does this capital compare on a relative basis versus what is going into other global markets, India has actually become one of the larger markets across the APAC right now, maybe potentially number one or number two for most financial sponsors. What do you think is driving that growth really from both an absolute dollar perspective as well as on a relative basis?

Nitin Maheshwari: That's a great point, Abhinav. In fact, in most of our conversations with all global private equity firms, when we ask them what are the two biggest markets, most of them will pick India and Japan, which really tells you something about evolution of India in their books. So I would say what's driving that and what themes are playing for them from investing perspective, maybe we can put them in four buckets. So one is what we call India for India. We obviously have a large base of consumers for products/financial services/other services, all the way from food delivery to quick commerce, right? Second is India for the world, where we see exports of services, which has been obviously a very successful story for India for the last 40 years since all IT services came together. But now we're seeing the shift to India for the world for manufacturing. I'd say digital transformation at scale. We've gone through a journey which no other country has gone through in the last few years on everything going digital, thanks to the free data that we have received as consumers. So that's really creating large stable businesses for us. Infrastructure, you know, if you had to pick one thematic across all funds who can do infra, India will show up in the top two or three markets globally where there's a need for capital given government's push and that's what we're seeing. So all of this has come together at the right time, and government's done the right things with respect to targeted policy reforms, which is driving some of what we're seeing,

Abhinav Bharti: A couple of questions more, Nitin, for you. One, we are seeing funds in the past settled like you mentioned in the beginning, more for minority stakes and family-owned companies. Today, majority stakes are also par for course. Are you seeing this more in specific sectors that is happening right now, or is it now a more broader theme?

Nitin Maheshwari: I would say control is par for course across sectors, but there are two or three guiding factors that sponsors use. One, sponsors are not managers, right? So they need to own companies where adequate talent is available. So we've seen that in sectors such as technology services, broader consumer tech, healthcare, specialty manufacturing, these are sectors where there has been talent available and sponsors have been comfortable owning control. There's general preference for sectors which are less regulated, which means export-oriented sectors or even pharma, right, where we've had many examples of real success that sponsors have seen. But if we reflect on the last 15, 20 years of private equity history in India, you'd see that each private equity firm has areas of strength and areas where they have seen a patent recognition from either what their firm has done globally or what they've done in India. So doing more of the same has helped all of these clients of ours. So, Abhinav, just turning the tables and asking you a question as well. Public markets actually have been a big enabler for success of private transactions in India, for private equity investors in India. What is driving the depth that we have seen in public markets today? What are the risks to this depth, and what could change in the next three to five years as you reflect on all the activity that we've seen in public markets?

Abhinav Bharti: I think the key driver, of course, remains the fact that India is right now going through a period where multiple pools of capital have emerged that are supporting the market. The way I really look at it is at a very high level, yes, we talk about the domestic and foreign capital that is investing in the capital markets. And depending upon the sign of every year, positive or negative, domestic capital has generally been positive now for a number of years. It shows up in the strength of the performance of the market that we see for the course of the year. By some estimates, we are, call it just about single digit total household wealth being invested in equity markets at this point in time. So there's still a long way to go for this financialization of savings and equity becoming a larger part of household wealth, that trend playing forward. The other aspect that actually is very supportive of capital market activity is the expansion of liquidity. And what liquidity does is it allows for investors to be more forward-leaning when it comes to evaluating situations, because they know that if there is a volatile period, their ability to get out and have liquidity available, both coming in, going out, is higher. These are all supportive factors. And if you really ask me, the only other market that I can see which has such kind of depth, obviously, still at a very different scale, is the United States. And we know that has really been a big enabler for the US economy over long periods of time. The proof of the pudding lies in how healthy the IPO market is. And over the last two years, while most markets globally had been shut for IPOs, India has remained quite active. Yes, you can argue that the size of deals was smaller, but they were still out there happening and delivering returns for investors. And if anything, we're starting to see an expansion of larger IPO sizes coming to the market this year and maybe potentially more next year.

Nitin Maheshwari: And just as you reflect on the public investors who are buying into your IPOs, who are these investors? Is that investor base expanding? Are we seeing new players coming to market or are these the same guys just investing more? Are these the homegrown mutual funds or global institutions in terms of, let's say, last two, three years of IPOs that you've led?

Abhinav Bharti: So the quick answer is both, but really if you peel the onion a bit more, you would see that within the same mutual funds, we are now starting to see a lot more dedicated capital, which is thematic in nature, being raised in the market. So for example, an infrastructure-specific funds being raised by mutual funds, they are looking for infrastructure opportunities, ESG-focused funds. So we are starting to see all of these thematic funds being raised and that capital being deployed. A new pool of capital that has really become quite sizeable over the last few years is AIFs. Of course, the expansion of FinTech ecosystem in the country has enabled direct investing as well. And I should not forget about what is called the 401(k) event or moment for India. As the percentage of capital that pension funds and NPS start allocating more and more towards equity, this is going back to the US thematic back in the '70s and '80s when their 401(k) investment plans started investing into equity markets and became a one-way buyer of equities, you could actually see a significant tailwind coming from there. So that's just the domestic landscape. If you look at the international or the global investor base, that also is increasing in tandem. Of course, even now the large part is coming in from EM dedicated capital, where India is now a larger part of the pie. Just for reference, our weightage in MSCI emerging market has now become double of where it was five years ago at about 19% today. So clearly that benchmarking has automatically led to higher EM flows. But more importantly, as companies have become larger, I mean, we have today 110 companies which are above 10 billion in market cap. These companies have become large enough for even the global strategies to start looking at India.

Nitin Maheshwari: That makes sense, Abhinav, and we've clearly seen capital flowing from both domestic and international sources, and just like private equity, public institutions are also looking at India favorably, the global investors. That's a great point.

Abhinav Bharti: Nitin, just changing tracks because I know we talked a lot about what is working well for the market and its impact on both IPOs and prior to that the private capital investing that we're seeing on your side. What about the regulatory environment that you are seeing? Global funds have been pushing for easing and regulations for disclosure and taking listed companies private. Do you think this is moving in the right direction? What more needs to get done here?

Nitin Maheshwari: Uh, that's a great question, actually, and that I would say is actually an enabler as well for the investments we're seeing. India, by nature, is a very complex market. We are not one country, but many, many within, if you compare the scale of what we have to offer vis-a-vis any other global market. So it is a tough job for the regulators to manage the complexity that we entail. And within that, our regulators have done a great job in really managing the risk in very difficult periods, including periods like COVID. So overall, credit to them to have the kind of stability we've had, and I know you have the data point you talk about the India WIX versus global WIX, right? Where we've actually in the recent past have been better off. So if I had to pick one example on regulatory evolution, let's pick take-privates, where we have a unique process called reverse book building. Over time, we've seen that has been a big deterrent for our clients as they think about transactions, as they think about take-privates, because reverse book building makes it very expensive and uncertain. SEBI has actually continued to bring changes to the regulations to make it consistent with global markets. We finally, as of last month, have a new update, which is forthcoming, which will make take-privates based on a fixed price delisting process. So we're looking forward to that and some of those examples are relevant for how private equity and other global investors view India.

Abhinav Bharti: Final question for you before we wrap up today's podcast. Looking ahead, where do you see the biggest challenges are, and same for biggest growth opportunities?

Nitin Maheshwari: In terms of the challenges, I would say the biggest risk that we see today is our linkage to the global macro geopolitics. As I mentioned, there's a lot of dependence on exports and imports. So we are connected to what's happening in the world right now. And as I think of opportunities, I would say just continue to tap in public markets for private equity. Strategic buyers, which have so far not been, let's say, in most processes that we have run or assets we have sold, but global strategic buyers coming back to India and buying private equity assets will create a lot more optionality for private equity clients. Take-privates where if regulations do change, there could be a certain list of companies which would prefer to be private, and that could be a good opportunity for private equity clients. So those would be the key challenges/opportunities that I'd highlight.

Abhinav Bharti: If I were to conclude this, is it fair to say that the way to really think of it is the private equity landscape has a long track record in the country. We have now seen at least two decades of investing and exits across a number of funds, and that gives confidence to the fact that this is a market where you can stay invested, grow your capital, and get that capital back as well. The confluence of all the fundamental macro thematics that have worked in India's favor the last three to five years has obviously made the economy and economic aspects very attractive, both for the global investors, domestic investors, but equally for private equity investors coming in at the stage of the companies and their life cycle where they generally do invest in. Some more changes certainly needed. There are potential pitfalls, but fair to say that so far, the country as a whole has managed to figure out a way to make things work quite well.

Nitin Maheshwari: No, very well summarized, Abhinav, and certainly, I would just say that India continues to be top two markets in Asia Pacific for sponsors, and we expect with the depth that we are seeing in both private and public markets, that is likely to continue.

Abhinav Bharti: Nitin, thanks for joining me today. Lots of great points for us to take away and think about here. Thanks to our listeners for tuning in to another episode of What's The Deal?

Nitin Maheshwari: Thank you.

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