The much awaited India Private Equity Report 2019 is out. Do you expect the strong investment momentum to continue? To what extent will the poll outcome, jittery markets, low consumer sentiment affect investments in the coming days and months?
We expect the investment trajectory to be fairly strong and we have tracked around $9-10 billion of capital that went in quarter one. The last two years saw about $26 to $27 billion. Last year, we had a closing of about $26.3 billion. So Q1 saw $10 billion investments while Q2 might be a little bit slower, primarily driven by election and a wait-and-watch from an investment perspective,
But investments are driven more by fundamentals, sector fundamentals, growth etc. If you look at the sectors that have driven investments, at least 40% of investment in 2018 was driven by consumer internet and banking. These are the two sectors where we expect continued strong growth going forward. We expect 2019 to be another bumper year.
What about valuations? Investors have always complained that valuations tend to be on the higher side. Is there a correction given the volatility we are seeing in stock markets?
Valuations will likely be fairly bungee. I am not sure I would describe it as froth. I would say valuations are driven by a couple of things — supply by the number of participating funds and as we talk about in the report, the number of active funds is going up steadily. Year-on-year, it is going up by about 10-15 and as we talk to our clients, we find most deals are now much more competitive than they were five years ago.
The number of participating funds can be anywhere from 6 to 10 versus pure funds. The number of participating funds in processes that are well understood by all funds only mean that valuations will go up.
Secondly, from a growth perspective, across these sectors, we do not necessarily see a growth slowdown. Earnings growth in effect drives valuation expectations. Structurally most of the sectors that I spoke about — a) consumer internet is seeing really rapid growth; b)banking continues to be fairly strong etc. We do not necessarily expect valuations to correct.
I would not describe it as froth, it is just slightly higher valuations that most people are happy paying and so that is our view.
Also, when it comes to private equity, that is a true measure of how good an investment is. In terms of return multiples, how do you see 2019 play out? I am asking this in the backdrop of the volatility we are seeing in stock markets.
2018 was a good year. Even without the $16-billion Flipkart exit, it was an excellent year from an exit perspective. That exit took it to $32 billion in terms of exit values. Even without that, it was one of the best years from an exit perspective because there was a whole range of exits. There were a couple of retail exits, a couple of IT exits like Intelenet for example and GlobalLogic by Apax. It was just a broad-based set of exits last year and that is the only factor that we need to consider other than secondary exits which will continue to be fairly strong.