Indian private markets brace for correction

The writer is CEO of BlackRock.

For Bangalore private equity and venture capital firms, 2021 was a good year. Inflows surged to record levels and a flurry of tech companies achieved “unicorn” status, with capital raises that valued them at $1 billion or more.

As the central bank’s largesse supported markets around the world, there were some $65 billion inflows into the Indian private equity and venture capital industry in 2020, according to data from Credit Suisse.

India added 43 “unicorns” during the year, bringing the total in the country to 93 with a combined value of $330 billion. That’s almost 10 percent of the 1,000 unicorns that Credit Suisse estimates there are worldwide.

However, it is clear that 2021 may be the best it can be for a while for such young private companies as tighter financial conditions emerge. Interest rates are now rising from the depressed levels that had lasted since the 2008 global financial crisis faster than anyone expected just a few months ago. Investors are likely to be more demanding both in terms and in the returns they seek as a result.

Bangalore is preparing for the eventual correction of valuations. The only question is how bad it will be and how bad the side effects will be.

The contribution of Indian unicorns to economic activity is significant. Their collective value is equal to 10 percent of the market capitalization of publicly traded companies, compared with 4 or 5 percent in the US and China, according to Credit Suisse. Icons of the new economy like Ola, the ride-sharing company and food delivery services, create hundreds of thousands of jobs each year for relatively low-skilled young people.

The wealth effect was clear in India’s big cities as young tech entrepreneurs cashed in their holdings to buy luxury residential homes, before their share prices could correct themselves. Previously, only older tenants who had saved up for decades to afford such opulence could shop in enclaves in Gurgaon and Bangalore.

In hindsight, many industry figures believe that central bank liquidity created a bubble in areas of Digital India, just as it did in the US.

Until the end of last year, there was little differentiation between the strongest and the weakest business models. “We would see companies being valued on metrics like price-to-view,” one Mumbai investor said sarcastically.

Credit Suisse analysts also noted that “inflows exceeded the absorption capacity of companies.” Only a handful of those tech companies that went public last year are now above their initial public offering price.

“It feels like the US in 1995, right after Netscape went public. We just had our first wave of tech IPOs in India in 2021 and there is a lot ahead for us this decade,” said Rahul Khanna, founder of Mumbai-based Trifecta Capital, a firm providing venture debt and growth capital. to India. Opening.

But with valuations likely under pressure, some investors are wary of what came after Netscape. Companies like General Atlantic and Lightspeed did virtually no new transactions in 2021 and instead focused on supporting their existing portfolio companies.

“We see the same opportunities as last year, but now the founders no longer demand decisions in two days,” said Bejul Somaia, a partner at Lightspeed in Delhi. “We can meet entrepreneurs and build conviction. Last year, there was a lot more anxiety.”

The correction has hit the public market more than the private one. So food delivery service Swiggy remains private and is valued at $10.7 billion compared to Zomato, which has seen its share price nearly halve since November peaks at a level which is only 5 percent higher than its IPO price last July.

This is in part because investors have much more freedom to mark their private portfolios than their public holdings. With the latter, accounting standards are clearer, making it easier to benchmark companies. But it is inevitable that the current valuation gap between the public and private markets will narrow.

In the long term, stronger foundations and greater differentiation mean that young companies are likely to play a larger role in supporting the Indian government’s aspirations to outperform other emerging and developed markets in everything from intelligence artificial until decarbonization.

But like the US in 2001 and 2002, there could be a rough period as some startups implode while tighter scrutiny exposes misconduct in others. Descending from dizzying heights is usually painful in the short term.

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