Indian private equity has come of age in the last 5 years – over 70% of the cumulative 25 lakh crore invested in unlisted companies has come in since 2016 and similarly over 70% of the cumulative 9 lakh crore of exits have taken place since 2016. And between foreign and domestic funds there is 3.5 lakh crore of dry powder available to invest.

As per CRISIL’s AIF benchmarking report for FY22; returns for venture capital and private equity funds have been equally strong. The average pooled IRR across 74 venture capital funds and 91 private equity funds are 21.15% and 19.34% respectively. And it is these returns delivered across funds and vintages that have led HNI investors; family offices, institutions, corporates, and their advisors to include unlisted investments as a core part of their asset allocation.

There are three types of private equity opportunities available today.

First, are angel investment opportunities in seed or Series A funding rounds for startups. The average ticket size for an investor is Rs 25-75 lakh and at this stage investors are primarily backing a founding team and an idea. The returns and risk are the highest at this stage of investment. The idea of angel investing has been popularized by shows like Shark Tank; and even though Indian venture capital firms have raised 40,174cr of commitments this remains a largely informal market based on personal networks and expertise.

The second type of opportunity is in mid-stage private equity. Here funds are investing 25-100cr in the Series B, C and D of companies. The risk is lower than angel investing because companies have established proof of concept for their business model; achieved product-market fit and have three to five years of operating track record. However, the returns can still be very attractive because deals are typically happening at valuations of 3-5x price/sales. This compares favorably to the 7-10x price/sales that late-stage private equity investments are made at and 10-15x price/sales multiples that startups have commanded at IPO. This means that an investor in mid-stage private equity benefits from both the fast growth of the startup and a multiple re-rating and this could potentially lead to outsized returns. Interestingly, the competition for mid-stage private equity deals is the lowest because fund managers need a unique combination of financial and operating acumen and startups need a fair amount of hand holding as they grow.

Lastly, we have late-stage private equity which encompasses pre-IPO & IPO investing and may even include PIPE transactions in listed companies. These investments are mostly financial in nature and have an element of capital market cyclicality to them because exits are most often via an IPO or a secondary sale. In contrast, exits in the early and mid-stage could also be to a strategic investor from the same industry – and who often pay a premium over a pure financial investor.

E-commerce, financial services, technology, real estate & hospitality, and retail consumer products are the five sectors that have garnered the most interest from private equity over the last five years. Financial services (lending, insurance, payments) and real estate are expected on this list because they are capital intensive sectors where business outcomes 3-5 years post investment are well understood. But it is interesting to see asset light industries such as e-commerce, technology, and retail consumer products garner so much interest from funds. And the rapid growth of these sectors has been made possible by game changing reforms such as India-stack; UPI for payments; 4G connectivity and 90% mobile penetration and GST enabled central logistics. And it is these reforms that are giving Indian startups a once in a generation tailwind.

The first 26 years of the Indian venture capital and private equity industry saw the creation of over 100 unicorns and I would not be surprised to see that number matched in the next 5-7 years. And private equity funds will play a vital role in both providing capital & expertise to these next generation of wealth creators and giving investors access to this exciting asset class.

Click here to know more about the funds being offered by Edelweiss Asset Management.

Disclaimer: Nalin Moniz is the Chief Investment Officer – Alternative Equity, Edelweiss Asset Management Limited (EAML) and the views expressed above are his own.