Mumbai, 11 August – The article in BusinessWorld Disrupt titled, “Like in cricket, playing the middle overs is imperative” authored by Gagandeep Bakshi, Director, Intellecap, was the 2nd one as part of a 24 article thought leadership series we have forged with Business World Group.

The article talks how mid-market private equity deals that serve the traditional SME market is imperative when it comes to insulating the economy.

It’s a big YES but its’ not going to be easy. As we brace ourselves against the 3rd wave of COVID-19, the Indian economy continues to face distress. As per ILO, more than 400 mn in India are at risk of sinking deeper into poverty. While the government has been taking various fiscal measures to support recovery and resilience, private capital to has a significant part to play.

We saw a large number of tech start-ups mushroom in the COVID-19 world and VCs also had their hand full. The gig economy and e-commerce sectors show promise for generating employment, but they have to continuously keep raising capital to support the negative cash flows. It has been an uphill task for many to keep afloat. India ranks 3rd amongst global unicorns after USA and China with a combined valuation of USD 116 bn across 35 companies. With over $35.7 Bn in total funding, Indian unicorns are also the largest job creators and employers in the Indian startup ecosystem. Approximately, 70% of these unicorns are loss-making. Given the current global crisis, a financial collapse would be catastrophic for the surmounting unemployment rate in India. This is where our traditional sectors bring in longevity and resilience to the economy.

Unfortunately, in these difficult times, mid-market private equity deals saw a drop of approximately 32% compared to the pre-COVID-19 year. We also saw a drop of ~ 50% in traditional sectors that support employment and capital flow. This can be substantiated by 2 key data points – Firstly, a large part of the capital moved away from traditional businesses towards tech opportunities and COVID-friendly healthcare to insinuate at the “new normal”. Secondly, control/buyout deals saw increased traction compared to mid-market deals. Private Equity funds focused on mid-market opportunities saw their risk appetite going down with many uncertainties brought about with this pandemic. On the other hand, sovereign funds with significantly longer investment horizons have also seen dwindling risk appetite as they have been opting to do co-investments as opposed to direct investments.

We are seeing some interesting trends which could explain some of the gaps that need to be filled:

• Our country has a depleting count of risk-taking private equity funds including the sovereigns on one side and a piling dry powder on the other. As per a report published by Indian PE and VC association and Bain & Company, there was $8 bn in dry powder available with funds in 2020.
• Buyouts have recorded significant growth of almost 10x in the last decade
• Share of growth deals ($10-50 mn) or the missing middle (between the VCs and the large PE / buyout funds) has been going down in last decade
• Significant increase in the proportion of >$100 mn deals as a percentage of all deals in value compared to $10-50 mn deals. This also shows that PE funds are increasingly preferring larger ticket deals in mature companies leaving a growing vacuum in the SMEs for mid-market deals.

So what will help insulate our economy and businesses from these black swan events:
• More mid-market private equity funds that can support the traditional SMEs
• Mainstreaming of impact is now becoming a reality and we need more of that to happen soon. Limited partners now have a wide range of options to deploy their capital and General partners are using impact to differentiate and create value. TPG, Bain Capital, KKR, Partners Group, and others have created dedicated impact vehicles
• We need our very own DFI – not one but a few which focuses on specific themes and support businesses across their life cycle
• Need for higher domestic capital participation from pension/retirement funds in private equity funds. As Non-government funds, pension funds and gratuity funds can now invest up to 5% of their investible surplus in Category I and Category II AIFs registered with SEBI, this not only provides for financial stability in the Indian startup ecosystem but also boosts the confidence of the Indian market
• Lastly and more importantly, we need many more risk takers that can continue to show confidence and invest in the businesses even in difficult times