2022 PE/VC investments stand 29% lower than 2021 at US$54.2 bn

 According to the IVCA-EY monthly PE/VC roundup, 2022 recorded investments worth US$54.4 billion across 1,211 deals, including 129 large deals (>$100mln) worth US$36.7 billion. Exits were recorded at US$18.3 billion across 249 deals in 2022, including 18 PE-backed IPOs.

Vivek Soni, Partner and National Leader, Private Equity Services, EY said, “After five consecutive record-breaking years, 2022 has recorded a 29% y-o-y decline in PE/VC investments. This was primarily due to a decline in deal sizes as the volume of deals remained fairly flat. Large amounts of stimulus by global central banks and the accompanying low interest rate regimes post COVID-19 had fuelled most of the mega funding rounds in 2021. However, the same got rationalized in 2022, which despite the decline, is the second-best year for Indian PE/VC investments till date.

Pure play PE/VC investments recorded a sharper fall of ~38% while the infrastructure and real estate asset class recorded a growth in PE/VC investments of 27%. The cautious investment climate also saw a rise in private credit deals as companies had to look for bridge funding/alternate sources of capital to avoid doing a down round or tide over short term liquidity needs. 2022 was the best ever year for credit investments at US$4.5 billion.

 

PE/VC exits were also lower by 55% on a y-o-y basis in the absence of large strategic and secondary deals. PE-backed IPOs recorded the sharpest fall of 78%, followed by secondary exits (-67%) and strategic exits (-63%). Following the poor performance of most startup IPOs that listed in 2021, there was a lull in PE-backed IPOs for the most part of 2022, however, 4Q2022 saw a revival with the listing of 10 PE-backed IPOs.

 

Both the traditionally favorite sectors of technology and e-commerce recorded a 68% decline in PE/VC investments. Though the financial services sector received the highest value of PE/VC investments in 2022, at US$10.8 billion, it declined by 7% on a y-o-y basis. The infrastructure (US$7.9 billion) and healthcare (US$3.5 billion) sectors were the only major sectors that recorded growth in PE/VC investments, at 45% and 68% respectively.

 

After a multi-year bull run, over the past five years, private equity investment and exit activity globally has been weighed down by inflation woes, recession fears, the rising cost of capital and elevated levels of uncertainty driven by geostrategic challenges. In India, while investors reset their valuation appetite in March / April, sellers took time to get there, leading to a bid-ask spread in most transactions, which delayed and in some cases derailed PE-backed transactions for a large part of 2022. This gap has been closing in the last few months and given the record level of India dedicated fundraises in 2022 (US$17.4 billion) and the high level of dry powder available globally, we could see a strong rebound in PE/VC activity in India, especially with global LPs planning to increase their capital allocations for India. We expect the startup space to continue receiving large investments, albeit at valuation multiples lower than 2021. There is high likelihood that Indian PE/VC investments in 2023 shall be meaningfully more than 2022 levels. Recession in the developed world, re-emergence of inflation, any flare-up in geo-political conflicts and potentially new and infectious COVID-19 variants remain key headwinds to watch out for in 2023.”

 

Investments

At US$54.2 billion, PE/VC investments in 2022 are down by 29% on a y-o-y basis despite a modest 4.6% decline in the deal volume (1,211 deals in 2022 vs. 1,269 deals in 2021). The decline was precipitated by a sharp fall in large deals in the buyout and start-up deal segments of the pure play PE asset class.

2021 was a record year for PE/VC investments in India, recording an all-time high of US$75.9 billion. In a bid to stimulate post-pandemic economic activity, global central banks encouraged a low-interest-rate environment which led to a massive capital influx into the VC & PE industry, ultimately leading to a funding boom. Major global investors, including Blackstone, Carlyle, Softbank, Tiger Global and Sequoia Capital, wrote big cheques across deal segments.

Number of large deals (value greater than US$100 m) declined by 30% in 2022 (129 deals vs. 181 deals in 2021). The decline in number of large deals combined with the fall in average ticket size meant the aggregate value of large deals declined by 38% y-o-y (US$36.7 billion vs. US$58.7 billion in 2021). There were eight US$1 billion plus deals accounting for US$16.0 billion in 2021 vs. just two deals worth US$2.9 billion in 2022. The largest deals in 2022 include Bodhi Tree’s US$1.8 billion investment in Viacom18 and Advent and Carlyle’s US$1.1 billion investment in Yes Bank.

The fall in pure play PE/VC investments was more pronounced, a 38% y-o-y decline (US$40.5 billion vs. US$65.2 billion in 2021). However, 2022 recorded a rebound in PE/VC investments in the infrastructure and real estate asset classes, a 27% y-o-y increase (US$13.7 billion vs. US$10.7 billion in 2021).

Buyouts recorded the sharpest fall in terms of value, down by 45% y-o-y (US$11.4 billion vs. US$20.8 billion in 2021) and 11% in terms of number of deals (55 in 2022 vs. 62 in 2021). This is despite large buyouts in the infrastructure and real estate sectors which recorded a 77% increase y-o-y (US$6.4 billion across 31 deals vs. US$3.6 billion across 29 deals in 2021). Pure play PE/VC buyouts declined by 71% in terms of value and 27% by volume (US$5 billion across 24 deals vs. US$17.1 billion across 33 deals in 2021). There were six US$1 billion+ buyouts last year and none in 2022.

While the startup deal segment continued to be the largest, receiving US$18.6 billion in PE/VC investments, its total deal value vs 2021 is down by 35%.  This has widely been termed as ‘funding winter’ for startups and has affected the fundraising plans of many companies which have shifted focus from growth to cash conservation / positive unit economics and are now deploying cost-cutting measures to reduce cash burn rates. This is despite the deal activity being fairly strong, with 814 deals, a marginal decline of 5% y-o-y. The big change seems to be a shift in the approach by PE/VCs, who have become more cautious and have cut back on big cheque sizes and are pushing back on valuation multiples given the significant increase in cost of capital and reduction in growth rates.

Global factors like geo-political tensions, its impact on global supplychains’ reliability, increased prices of energy and food commodities led to a significant increase in business risk premium and consequent spike in inflation. To combat inflation, most central banks raised interest rates, thereby increasing the cost of capital for investors as well as investees. This rise in uncertainty made investors cautious, who were now unwilling to underwrite the high multiples of 21, which in turn led to a reduction in dollar value of PE/VC investments as sellers / start up founders took time to come to terms with the new normal on valuation multiples.

In addition to global factors, domestic factors like the poor performance of IPOs of recently listed new economy companies has also affected PE/VC sentiment – that till recently were seeing IPOs as a viable exit option

Like startup investments, growth investments at US$15.8 billion across 183 deals also recorded a decline in ticket size, leading to a 19% drop in aggregate value y-o-y, while the number of deals declined by just 2%.

The slowdown in PE/VC funding created an excellent opportunity for private credit. 2022 was the best year for private credit deals both in terms of value and volume, recording US$4.5 billion across 96 deals, a 72% and 13% increase y-o-y respectively.

From a sector point of view, most major sectors recorded decline in value of investments in 2022.

• Financial services sector recorded the maximum PE/VC investments in 2022, both in terms of value and volume. In term of value, at US$10.8 billion, investments in the financial services sector in 2022 declined by 7% y-o-y.
• Technology and e-commerce, which were the favorite sectors last year recorded US$5.2 billion and US$5.1 billion in PE/VC investments respectively, both recording a 68% decline y-o-y.
• Infrastructure and healthcare were the only major sectors to record a significant increase in PE/VC investments. Infrastructure sector recorded ~US$7.9 billion in 2022, a 45% increase y-o-y. Healthcare sector recorded US$3.5 billion in PE/VC investments, a 68% increase y-o-y.

Spotlight: trend in PE-backed IPOs

2021 was a seminal year for PE-backed IPOs in India. Not only did it record the highest ever number of PE-backed IPOs which resulted large exit proceeds at rich valuation, giving multi-bagger returns to early PE/VC investors, but also saw a plethora of first-time listings by new-age startups.

However, the euphoria fizzled out in 2022, which saw global capital markets record sharp corrections amid major headwinds of rising inflation, interest rate tightening by global central banks, supply shortages, and geo-political conflicts. This dampened investor sentiment and reduced IPO appetite, especially after the sub-par post listing performance of many of the new-age startups. As a result, the number of PE-backed IPOs declined by 59% y-o-y and the corresponding exit value declined by 78%.

However, with inflation cooling off and the Indian markets holding ground on the back of a stable economy and strong domestic inflows, there has been a revival in IPOs in the fourth quarter of 2022. As a result, 2022 has emerged as the third best year for PE-backed IPOs.

There has also been a churn in the sectors that saw PE-backed IPOs. While 2021 had PE-backed IPOs in almost every sector, 2022 saw PE-backed IPOs only from a few sectors. E-commerce, which was one of the high-flying sectors for PE-backed IPOs, didn’t record a single IPO in 2022, despite there being a long pipeline of prospects at the beginning of the year with many ecommerce startups either postponing or shelving their IPO plans.

Financial services continued to remain the top sector for PE-backed IPOs, with consumer, technology, and healthcare being next in line.

If the markets remain stable, we could see a return of some startup IPOs, albeit with tempered down valuation expectations from what prevailed in 2021.

Exits

In 2022 exits recorded US$18.3 billion, a 55% decline compared to 2021. The sharp fall in the value of exits was on account of the absence of large strategic and secondary deals. In terms of volume, exits recorded a 11% decline compared to 2021 (249 deals in 2022 vs. 280 deals in 2021).

Strategic and secondary exits recorded US$5.2 billion (US$14 billion in 2021) and US$4.8 billion (US$14.4 billion in 2021) respectively, each declined by over 60% on a y-o-y basis due to fewer large deals.

While 2021 was a record-breaking year for PE-backed IPOs (44 IPOs), it was the worst performing segment for exits in 2022, recording a 78% decline in value (US$1.1 billion) and 59% decline in number of IPOs (18 IPOs).

Open market exits was the largest segment in 2022, with US$6.6 billion recorded across 80 deals, a 9% increase y-o-y.

The largest exit in 2022 was by Actis that sold its stake in Solenergi Power Private Limited to Shell Plc for US$1.6 billion.

From a sector point of view, the financial services sector had the highest value of exits in 2022 (US$3.8 billion across 40 deals vs. US$6.4 billion across 48 deals in 2021). The infrastructure sector recorded the second highest value of exits in 2022 (US$3.8 billion across nine deals vs. US$2.9 billion across 15 deals). Technology sector was the next big sector with exits worth US$2.7 billion across 38 deals (US$17.4 billion across 31 deals in 2021).

Fundraise

Despite the slowdown in PE/VC investments in 2022, India’s attractiveness continues to remain strong as evidenced by the ~US$17.4 billion raised by 99 funds in 2022, which is the highest ever annual value of India dedicated fundraises, a 124% y-o-y increase. The largest fundraise in 2022 saw Sequoia raise a US$2.9 billion Southeast Asia fund, with ~US$2 billion dedicated towards India[1].

In addition to the increase in India dedicated fundraises, there is a high level of dry powder outstanding globally of almost US$590 billion[2]. Compared to prior years, a disproportionately larger chunk of this dry powder is expected to come India’s way, as large global LPs, which until a year ago, were overweight on China, are now looking to balance their emerging market allocations by being overweight on India. This, coupled with the positive policy measures being taken by the government is expected to facilitate the continued growth of PE/VC investments in India.