A slew of factors, including imminent rise in interest rates, rising inflationary pressures, potentially hawkish monetary policies with winding down of stimulus programs, will see the private equity (PE) and venture capital (VC) market entering a different funding climate compared to the hyper-growth environment of the previous year. These factors are likely to impact the valuation multiples that have been on a record high over the past year and may cause some downward revision in some of the overheated segments, according to an IVCA-EY report.
The report titled 'India Trend Book 2022', launched at the IVCA conclave, said PE and VC investments in 2022 have gotten off to a good start with start-ups raising $10.3 billion in the first two months, up from $4.1 million from January-February period last year. However, it is 7.6 per cent lesser than the previous two-month period Nov-Dec 2021.
"The supply chain and rising inflation pressures have already had an impact on many of the portfolio companies of PE/VC funds and are expected to persist for longer than previously anticipated, thus making a focus on value creation more pertinent to ensure favourable exit multiples amidst margin pressures. This along with ESG could become the key areas of focus for PE/VC funds in 2022," the report said.
Yet, India has one of the fastest growing start-up ecosystems and that is expected to drive a lot more GP (General Partner) and LP (Limited Partner) allocations to the country. With global funds increasing India allocations and many new funds looking to enter the country, India dedicated fund raise too could pick-up pace in 2022, the report said.
However, the report also signaled a potential rebalancing in investors' portfolios if interests rates go much higher and persist for a longer period, which can impact India allocations too.
The ongoing conflict between Russia-Ukraine is also a growing concern to the start-up funding market in India. Any further escalation in the conflict could impact the already weak global recovery and in-turn investment flows into India, as 85 per cent of the funds invested in India are from global pools of capital.
The report said that the medium to long-term outlook for India is positive and that the Indian PE/VC industry could reach $100 billion in the next 2-3 years, which would make it the third or fourth largest PE/VC market globally.
"However, the immediate outlook for 2022 is a bit hazy due to the inflationary pressures and imminent tightening by central banks as well as the uncertainty caused by the ongoing geopolitical conflict between Russia and Ukraine/NATO nations....With better-than-expected Indian economic revival, successful vaccination drives and abating of the COVID pandemic, we expect 2022 to build on the momentum set in 2021. However, we remain cautiously optimistic given the significant rise in business uncertainty," the report said.
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