Startups must develop stronger & sustainable biz plans to continue receiving PE/VC funding: Study

“After registering 26 per cent dip in fund raising by PE firms last year i.e. from $5.7 billion in 2015 to $4.2 billion in 2016, the year 2017 could be the one for consolidation, with PE/VC (venture capital) firms chasing a business having a strong biz model with a focus on unit economics and profit,” noted the ASSOCHAM-Hammurabi & Solomon joint report titled ‘M&A landscape in India.’

It also said that to fulfil the expectations, government provided a boost to startups with a number of favourable announcements in the Union Budget 2017, which also addresses certain other concerns of the PE/VC investor community.

The study also said that Indian PE industry, finds itself in the thick of opportunities to map a new route to re-emergence. “Factors like improving business sentiment, making the strategic benefits of PE familiar among Indian enterprises and a pro-reform government would accelerate re-emergence.”

The core area to focus on should be the PE/VC exits to generate returns for Limited partners (Lps) and free-up capital for further investment. “M&A activity and a strong primary market are expected to buoy the exits.”

The study further noted that a strong alliance between stakeholders within the industry and the country's economic objectives would be required for PE to deliver its full potential to the country's economy.

“The key factors for success of private equity are - suitable growth opportunities for the industry and supportive regulatory framework,” said the ASSOCHAM-Hammurabi & Solomon joint study.

It also noted that regulatory framework governing the broader financial services and securities industry in India has a direct impact on private equity investors.

“With the introduction of safe harbor norms for offshore funds which are to benefit PE and VC industry and General Anti-Avoidance Rule (GAAR) from April 1, 2017 which are aimed at improving transparency in tax matters and help curb tax evasion the route to re-emergence looks more realistic now.

Considering that external environment provides a unique opportunity similar to the government’s ‘Make in India’ campaign, floating a new campaign on the same lines – ‘Manage Indian investments from India,’ could increase capital investment from domestic and foreign sources.

“With PE contributing more than 40 per cent of equity financing today, a set of cohesive and cogent policies specifically aimed at encouraging the flow of PE should be welcomed,” the report added.

Highlighting the role of PE investments in India’s economy, the study stated that the sector invested a total of more than $103 billion between 2001 and 2014.

It also said that despite a drop in 2008, capital inflows from PE have been more reliable than those from other sources of equity funding, including foreign institutional investment, IPOs and equity issuances, such as secondary offers and convertible instruments.

PE inflows have remained strong, even though India’s GDP (gross domestic product) growth rates have plunged from 9.6 per cent in fiscal 2007 to 4.7 per cent in fiscal 2014 amid high market volatility.

Noting that PE has been a broad-based source of equity capital, both in terms of sectors covered and individual companies, the study said that PE in India has invested in over 3,100 companies across 12 major sectors like telecommunications and others which are critical to the country’s development.

Besides, PE appears to accelerate job growth through its portfolio companies. “Between 2001 and 2016, the number of jobs at companies backed by PE posted a compounded annual growth rate (CAGR) on average of almost 9 per cent during the first five years after investment, while the annual growth rate at comparable companies without PE funds was just under three per cent.”