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In a year defined by global uncertainties, the Private Equity (PE) industry has proven its resilience, particularly in India. "The Fourth Wheel: Insights for the private capital ecosystem in India" report highlights the trends, challenges, and opportunities that lie ahead for the private equity sector.
2024 is a transformative year for private equity firms, with geopolitical tensions, economic volatility, and significant policy shifts reshaping the investment landscape. Despite a decline in private equity deals, exits, and fundraising activities in 2023 due to rising interest rates, there is cautious optimism among investors. About 50% of the private equity investors, we surveyed anticipate a moderate increase in global fundraising over the next 12 to 18 months. India is rapidly emerging as a key player in the global PE arena. In 2023-24, PE funds raised approximately USD 7 billion for deployment in India. About 67% of respondents believe private equity fundraising in India over the next 12-18 months will be strong with an increase in capital allocation. This suggests a high level of confidence in the Indian market and a positive outlook for investment opportunities.
Several sectors are expected to attract significant PE investment over the next three years. Retail and consumer goods, healthcare and pharmaceuticals, financial services, manufacturing, and IT/technology are all poised for substantial growth, with retail and consumer goods alone expected to capture 25% of investments.
As PE firms in India focus on value creation, strategic business alignment, cost rationalisation, and the integration of sustainability/ESG initiatives are emerging as critical strategies. Exits are increasingly being pursued through IPOs, strategic acquisitions, and alternative capital sources such as pension and insurance funds.
Looking ahead, the success of private equity in India will depend on its ability to adapt to the country’s evolving ecosystem. Factors such as the ease of doing business, the development of digital and tech ecosystems, and a commitment to sustainable growth will play pivotal roles. Artificial Intelligence is also set to revolutionise the industry, with firms that embrace AI potentially seeing improvement in efficiency.
Despite global geopolitical tensions, civil unrest, and valuation mismatches, about 50% of Grant Thornton survey respondents expect a moderate uptick in global fundraising over the next 12 to 18 months. India is in a pole position to benefit because of the sheer size of its economy.
According to the survey, 86% of respondents expect a higher allocation to India. However, challenges such as global geopolitical tensions and civil unrest in many parts of the world could put a dent in dealmaking, with 60% of respondents expressing concern over this.
The survey shows that about 48% of respondents foresee an exceptional increase in private equity deals in India over the next three years, while 50% expect moderate deal activity. Retail and consumer sectors, followed by healthcare and pharma, are expected to attract the maximum interest from investors. Fundraising over the next 12-18 months is expected to be strong with an increase in capital allocation. However, sentiments over valuations are mixed, with 57% of respondents expressing concerns about the current valuation levels.
Exits are expected to surge in the coming years. The private equity deals that did not go through in 2021 because of high valuations are likely to re-emerge in the market, particularly after the muted fundraising over the past two years. IPO is expected to be the preferred route for exits, but investors are also looking at other options, such as strategic acquisitions and alternative pools of capital (pension and insurance funds). However, valuations will need to be sensible, with a strong emphasis on profitability.
A private equity firm’s performance should be measured based on a strong portfolio IRR and a proven track record of identifying and nurturing profitable opportunities. A firm’s ability to enhance corporate governance practices and create value within its portfolio companies cannot be underestimated. AI is also expected to play a transformative role, enabling private equity firms to enhance data analysis, extract meaningful insights, and make more strategic decisions.
As India maintains a positive outlook with a consistent influx of funds into public and private markets, private equity—the Fourth Wheel—will be instrumental in driving the future of corporate India, powering the next wave of growth and innovation.
Our experts are eager to collaborate across the private equity value chain to help shape this Fourth Wheel.
*Until 2010, India had three major wheels powering its proverbial three-wheeler State-Owned Enterprises (SOEs), Indian Family Businesses (IFBs), and Multinationals (MNCs). However, since then, private equity has emerged as the ‘Fourth Wheel.’ Grant Thornton Bharat coined this term in 2010, representing the emergence of private equity in the Indian corporate landscape, which in our opinion has aligned with the other three wheels, providing much needed growth capital for India Inc.’s new entrepreneurs to scale up holistically.