ESG And Climate Agenda Came Into Sharper Focus In 2022 In Terms Of Investments

By Outlook Planet Desk April 20, 2023

India's conventional industries have become a desirable place to invest, with industries like BFSI, healthcare, and energy dominating and ESG taking centre stage

ESG And Climate Agenda Came Into Sharper Focus In 2022 In Terms Of Investments
Private equity in India has experienced extraordinary growth.

India's share of private equity and venture capital (PE-VC) investments in the Asia-Pacific increased from 15% to 20% between 2021 and 2022 as China + 1 tailwinds and India's macroeconomic stability made it a promising investment location amid a slowdown in regional capital flows. In a challenging year for private equity internationally, India saw investments of $61.6 billion, a slight decline of 12% from the record value of $69.8 billion in 2021. More than 2,000 deals were completed, maintaining the robust deal flow from prior years. Strong domestic consumer sentiment helped traditional industries, led by BFSI, healthcare, energy, and manufacturing, grow by 50% to almost $28 billion while demonstrating resilience. 

With investments in renewable energy and EV rising to approximately $7.9 billion in 2022, ESG became a breakout subject. Healthcare investors had a great year, with notable exits of healthcare providers throughout the year, in contrast to sectors like consumer tech and IT/ITeS segments that saw a dip. These are some of the trends and observations made from India Private Equity Report 2023, jointly published by the Bain & Company and Indian Venture and Alternate Capital Association (IVCA).

"Long-term prospects of the Indian market continue to be bullish, in spite of the near-term global slowdown. The robust fundamentals of the Indian economy make it an attractive destination for private equity, as evident from the fact that India crossed $60 billion in investments for a third time in a row”, said Arpan Sheth, Bain & Company Partner and co-author of the report. “India has also continued to increase its share of PE-VC investments in the Asia-Pacific region, with $1 of every $5 invested in the region being invested in Indian assets.”  

Although the first half of 2022 maintained the speed of 2021, the private investments ecosystem slowed in the second half as the world's sentiment shifted to caution in the face of escalating geopolitical tensions and cascading macroeconomic difficulties. Mid-sized and small-sized agreements gained share in the total deal value as the composition of deals changed, while blockbuster deals worth more than $1 billion became more elusive. Due to discrepancies in valuation estimates and constrained finance markets, buyouts have also stalled.

“We expect the short-term softness to continue with growth uncertainties, tight credit markets in the US, and tempered public market valuations (and implied private valuations), leading to delays in deal closures with limited deployment pressure on investors,” said Sriwatsan Krishnan, Partner and Leader of the Private Equity Practice, Bain & Company.

The year saw venture capital continue to make a sizable contribution to deal volume, but average cheque sizes decreased. Despite decreasing volumes, the value of PE deals remained largely stable. The most important deals in 2022 were in media and entertainment (Viacom 18) and banking (Yes Bank), with several significant deals in energy and manufacturing following. Traditional industries dominated the top deals. In 2021, the consumer technology and information technology (IT) sectors accounted for around 60% of deal value; by 2022, this had dropped to almost 30%. These industries saw a slowdown throughout the year as a result of uncertain global conditions, testing times for modern business models, and difficulties with export demand for the IT industries. Exits decreased from an all-time high of $36 billion in 2021 to $24 billion in 2022. Traditional industries continued to dominate exits, increasing the share of departures over $100 million to 75%.

The percentage of exits from traditional businesses that were over $100 million rose to 75%.

Almost $10 billion in acquisitions are expected to be made in the BFSI and fintech sectors in India in 2022, making up 18% of all PE-VC investments made in the nation. With growth supported by a sizable untapped credit population, rising consumption by an expanding middle class, and willingness to credit, particularly for discretionary expenses, lending is a significant theme driving investments across NBFCs and fintechs. Players are innovating more and more through both offline and digital models, establishing low-cost structures that target relatively rural areas (which have historically been underserved by banks) and utilising alternative data to speed up disbursements and drive underwriting.

India's healthcare industry has become an appealing investment following the pandemic. The sector dominated exits, controlling 16% of total exit value, with agreements of $4.3 billion in 2022, at about 8% of total PE-VC investments. A few prominent exits in the sector include KKR's $1.6 billion public markets exit from Max Healthcare, Everstone's exit from Sahyadri Hospitals, and the IPOs of Medanta and Rainbow Hospitals. Healthcare providers, pharma, diagnostics, and single-specialty providers' tenacity is allowing the industry to keep growing share as investors seek stability in uncertain times.  

ESG: Moving from mind-share to wallet-share

The ESG and climate agenda also came into sharper focus in 2022, with investors accelerating their ESG journeys from ‘mind-share’ towards ‘wallet-share’, as energy transition received a boost with multiple large clean energy deals undertaken by investors. Investments in ESG assets more than doubled, from around 5% over the last few years to 13% of India’s overall PE-VC investments by 2022, witnessing nearly $7.9 billion in deal value.

These investments have been largely focused on clean energy and electric mobility accounting for approximately 90% of $19.2 billion invested in ESG between 2018 and 2022. Clean energy, especially solar, saw strong deal activity in 2022 with investments of $5 billion, supported by increasing cost competitiveness of solar against thermal energy, regulatory tailwinds for renewables and an acceleration in the climate agenda. Approximately 90% of the $19.2 billion invested in ESG between 2018 and 2022 went towards sustainable energy and electric transportation. 

The Investor perspective

India has improved its share of the Asia franchise for top global funds despite an increase in fund sizes. Leading Indian general partners (GPs) have for the first time raised funds in excess of $1 billion. Despite having a lot of dry powder, investors have been forced by the shifting attitude throughout the year to concentrate on fewer, higher-quality assets and drive value development inside their portfolios with a focus on profitability.

Rajat Tandon, President, IVCA, shares, “2022 witnessed steady growth in healthcare, energy, financial services, banking, and insurance, which is a testament to India still being a bright spot in the APAC region. Private Equity players remain positive in the long term as business fundamentals continue to evolve with improved unit economics in these core sectors and investors back higher-quality assets within their portfolios with a dedicated push towards profitability.”

Both limited partners (LPs) and sovereign wealth funds (SWFs) indicated a noteworthy shift from a co-investment approach to solo deals as well as an increase in commitment to India. Large SWFs and LPs participated in single agreements, which had volumes that had tripled since 2020 and were valued at $6 billion in 2022. Sector diversification was yet another important theme, and many investors made their most significant first investments in 2022 in a few established areas.

After the storm, a cautious prognosis for 2023

Particularly in the previous ten years, private equity in India has experienced extraordinary growth, expanding exit opportunities and moving from a base of 200 active investors to over 800. The Indian possibility remains alluring even as investors take a more cautious stance in 2023. Deal flow is expected to change in the near future, with fewer big ($1B+) purchases and a greater emphasis on portfolio company success as funds turn inward. Buyouts and other mega deal activity will be rather quiet during much of 2023. Strong consumer sentiment will continue to support traditional industries and ESG-themed investments, while consumer technology could speed up structured agreements.