Indian PE/VC investment flows drops by 69 % in July, after good six months

PE/VC investments in July 2022 were the lowest in over a year, both in terms of value and volume, according to IVCA-EY monthly tracker.

PE/VC investments flow in July 2022 were 69% lower than the value recorded in July 2021 ($9.7 billion) and 40% lower than investments in June 2022 ($4.9 billion). July 2022 recorded 74 deals, 45% lower than July 2021 (134 deals) and 37% lower than deals in June 2022 (118 deals). 

The share of pure play PE/VC investments (excluding real estate and infrastructure sectors) too dropped to a low of 40% in July 2022, compared to 90% in July 2021 and 82% in June 2022. The sharp drop in PE/VC investments was precipitated by a decline in both start-up and growth investments, each recording a decline of over 75% in value and over 30% in volume, according to the tracker.

July 2022 recorded just six large deals (deals of value greater than or equal to $100 million) aggregating $2.2 billion, compared to 20 large deals worth $8.3 billion in July 2021 and 12 deals worth $3.0 billion in June 2022. The largest deal in July 2022 saw the Edelweiss Infrastructure Yield Plus fund buy eight road assets of L&T for $886 million.

By deal type, buyouts were the highest in July 2022 at $1.6 billion across five deals ($1.1 billion in July 2021 across nine deals), the highest value of buyouts in nine months. 

Start-up investments that have been receiving maximum PE/VC investments over the past year witnessed a sharp decline of 76% in terms of value and 44% in terms of volume, recording $820 million across 54 deals ($3.4 billion across 97 deals in July 2021). 

Growth investments too declined significantly, nearly 88% in terms of value and 31% in terms of volume, to record $499 million across 11 deals (16 deals worth $4.3 billion in July 2021). Credit investments recorded $22 million across three deals (five deals worth US$678 million in July 2021). 

Private investments in public equity (PIPE investments) were almost non-existent with just one deal worth $0.5 million (seven deals worth $243 million in July 2021).

From a sector point of view, we are witnessing a revival of interest in hard assets after almost two years. Infrastructure was the top sector in July 2022 with $1.4 billion in PE/VC investments across four deals ($391 million across seven deals in July 2021), followed by the real estate sector with five deals worth $411 million (seven deals worth $560 million in July 2021). 

The third largest sector was financial services, with $361 million recorded across 17 deals ($440 million across 11 deals in July 2021).

Vivek Soni, Partner and National Leader, Private Equity Services, EY said, “after remaining resilient for almost six months amid global headwinds of tightening liquidity and rising inflation, Indian PE/VC investment flows for the first time have shown some tepidness. Deals are taking longer to close as investors ask tough questions and take their time to process their deal underwriting thesis".

While start-up investments had propped up PE/VC investments for the past one and a half year, they recorded a sharp decline of 76% y-o-y. Buyouts was the only segment that recorded growth in July 2022 at $1.6 billion compared to $1.1 billion last year. Share of pure play PE/VC investments (excluding real estate and infrastructure sectors) too dropped to a low of 40% in July 2022, compared to 90% in July 2021 and 82% in June 2022.

PE/VC exits too declined by more than 70% both sequentially and on a y-o-y basis in the absence of large strategic and secondary deals. PE-backed IPOs, which were one of the defining features of PE/VC exits last year, continue to remain elusive in 2022.

"As interest rates harden, we are witnessing a revival of PE/VC investments in hard assets after a gap of almost two years. Infrastructure was the top sector in July 2022 with $1.4 billion in PE/VC investments across four deals, followed by the real estate sector with five deals worth $411 million. While e-commerce has taken a backseat in 2022, new investment themes like media and entertainment have emerged over the past two years. Our spotlight section covers the PE/VC investment trends in the media and entertainment sector in detail," he said.

With the US staring at a recession and further tightening by the FED and the RBI predicted, the easy monetary and fiscal policy era is behind us. Furthermore, with the continuing geo-political conflict putting additional strain on weakened European economies and the rising tensions in the South China sea area, the global economy is more vulnerable than ever before. 

While India has remained fairly resilient, it is feeling some pressure due to the falling rupee and rise in inflation. This rising cost of capital is causing more VC funds to emphasize on positive unit economics and curtailed cash burn rates while making investment decisions.  This is expected to increase the disparity between the ‘haves’ and ‘have nots’ and drive consolidation across sectors, with well-funded category leaders buying out those with shorter runways.

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