• With listed equities at record highs, PE investors have completed bumper block trades
• Trade sales are gaining ground from a low base, sponsor-to-sponsor sales remain strong
• Non-traditional exit channels, including continuation funds, betray lingering challenges

India exits have been on a tear post-pandemic, with total proceeds jumping 354% year-on-year to USD 32.8bn in 2021 and plateauing just north of USD 22bn in 2022 and 2023, according to AVCJ Research. With many IPO processes on hold for the recent national election, the USD 5.8bn generated in the first half of 2024 is both underwhelming and understandable.

Seven GPs and LPs contacted for this story said they fully expect a rebound in the second half – but that’s hardly the point. India-focused investors have interpreted the exit boom as redefining the market, demonstrating IPO and sponsor-to-sponsor routes as now secularly open. While historical concerns about constrained liquidity have not disappeared, they are no longer top of mind.

“We don’t take comfort in India based on whether or not the second half of the year is going to be strong. We take comfort in the fact that India is now the fourth largest capital market in the world,” said Praneet Garg, a managing director at fund-of-funds Asia Alternatives.

“That has a direct and immediate impact on PE exits because people can sell USD 500m and USD 1bn blocks now. That’s a structural comfort because it shows the depth of the market has increased.”

Large-ticket open market trades of private equity-backed companies are not entirely new to India. In contrast to developed economies, India is known for public market exits that take place over periods of years. It’s rare for more than 40% of a company’s IPO proceeds to go to exiting PE players. Investors then exit gradually and with restraint to maintain confidence in the stock.

Post-COVID, the blow-up in consumer internet valuations – a result of now largely absent global hedge funds piling into companies that were previously unable to list because they are pre-profit – has normalised. Hedge funds have been replaced by domestic institutions, mostly mutual funds cashed up by popular auto-debit investment instruments called Systematic Investment Plan (SIPs).

Those mutual funds are now setting prices with a preference for traditional sectors and a renewed confidence in India’s macro fundamentals, geopolitical opportunity, and government stability.

This has set the stage for a flurry of large open market trades by private equity firms in the past 12 months, with EQT selling shares in IT services provider Coforge worth USD 963m and Canada Pension Plan Investment Board (CPPIB) offloading USD 746m in Kotak Mahindra Bank stock. As recently as April, Bain Capital sold a block of Axis Bank for about USD 429m.

Since 2021, GPs have generated about USD 30bn in open market sales according to AVCJ Research. This compares with USD 9.6bn during the prior four years. KKR’s sale of its 27% stake in hospital chain Max Healthcare and Tiger Global Management’s exit of a 23% interest in cloud software provider Freshworks, for USD 1.1bn and USD 1.2bn respectively, are among the largest transactions.

“When you’re able to do these large block sales in the market, it’s a huge measure of confidence,” said Abhinav Sinha, head of technology and telecoms at British international Investment (BII), a prolific venture and middle-market investor in India.

“The investors are essentially saying they’re not going to go for this initial offer of sale yet because they have patience, the company is continuing to do very well, and they can wait to sell when the time is right. That gives a lot of stability to the market.”

Strategic intent

Still, public markets – shares sold at IPO and through subsequent block trades – amounted to just USD 7bn, or 32% of Indian exits, in 2023, AVCJ Research’s records show. It’s worth noting these figures only capture shares offered for sale by GPs. Including shares offloaded by all types of investors, Bain & Company estimates the proceeds amounted to USD 29bn.

Another quirk in the data is that transactions featuring various multi-strategy, sometimes quasi-private equity or institutional players as buyers are sometimes classified as different types of exits.

But the rough trends that can be distilled go some way in supporting anecdotal feedback from the industry about a rising tide of M&A-driven exits. Trade sales came to USD 2.2bn in the first half of 2024, more than twice the sponsor-to-sponsor total. This puts the former on track to eclipse the latter for the first time in five years.

“Large corporates headquartered in London, New York, Hong Kong, and Singapore have a hole to fill in India. Their clients are all present here. They need to be here,” said Manish Kejriwal, founder of Kedaara Capital.

“In the past, they’ve ignored India. That’s understandable because of the complexity of doing business in India. But now they’re willing at least to make the effort to re-evaluate that – and that’s a discussion in almost every boardroom around the globe.”

To some extent, there is believed to be a sectoral lens to this activity, with healthcare, for example, considered slightly more conducive to strategic acquisition than financial services.

Yet the standout healthcare exits in the past year have been to sovereigns and financial sponsors. These include TPG and NIIF exiting Manipal Hospitals to Temasek Holdings in a USD 2bn deal and True North selling KIMS Hospitals to The Blackstone Group in a USD 400m roll-up with CARE Hospitals. AVCJ has no record of local industry leader Apollo Hospitals facilitating a significant private equity exit.

Meanwhile, global financial strategics that have historically showed little interest in India could begin exploring the market, according to Divya Sehgal, financial services lead at True North, which clocked more than USD 1bn worth of exits in this sector alone last year to a variety of buyers.

He pointed to HSBC’s interest in Indian mutual funds as a case in point. In 2021, the banking giant acquired L&T Investment Management for USD 424m and has since doubled down on the strategy with various vehicles. Others are expected to follow.

“Every control trade that happens, I hear Japanese names and Middle Eastern names, which I didn’t used to hear earlier in a meaningful manner,” Sehgal said. “I see that as a portent – if they are engaging, it will happen, and they will adapt.”

This adaption process will require corporate decision-making, which can take up to 18 months, to fit into a PE world where decisions are made in as many weeks. Many global strategics have experienced misadventures in India, but Sehgal is in the camp that believes comfort has been rebuilt. “I think water has passed under the bridge,” he said.

Acquisitive locals

Vivek Chhachhi, a managing partner at CX Partners, is tracking some initial interest from global strategics but remains sceptical about deal flow in the foreseeable future.

CX is in the process of selling a majority stake in drug development services provider Veeda Clinical Research at a valuation of about USD 650m. Chhachhi declined to comment on specific situations, but he expects two or three exits this year with financial sponsors the keenest counterparties. In one instance, the firm is planning for an IPO while entertaining interest from strategic players.

“They [global strategic buyers] show up. They express interest, go through the data room and do management meetings, but I’m not fully confident they will actually cross the line,” Chhachhi said. “Global strategics are coming, but I’m hearing about them far less often than the other exit options.”

At the smaller end of the market, most hopes of increased strategic appetite are being pinned on domestic companies. Standout activity on this front includes Tata Group paying USD 1.3bn for online grocer BigBasket, providing an exit for BII among others.

Also notable is True North nixing IPO plans for Fincare Small Finance Bank in favour of merging the consumer lender with listed counterpart AU Small Finance Bank, creating an entity with a balance sheet of INR 1.1trn (USD 12bn). This ended a 13-year investment period for the private equity firm.

In a similar instance last November, Paragon Partners shelved plans to IPO advanced manufacturing player Maini Precision Products for an unlikely trade sale to Raymond Group, a company best known as a fashion retailer. Raymond paid USD 82m for a 59% stake, including Paragon’s 27%.

The first attempt at an IPO was abandoned in early 2022 due to a global rout of listed tech stocks. Having tentatively pushed out the offering to mid-2024, Maini received inbound enquiries from international and domestic strategic that had seen its draft prospectus, said Niten Lalpuria, a partner at Paragon. Raymond, which has less publicised interests in automotive and tooling, prevailed.

“We knew we could have waited another year. We were quite confident the IPO market was going to come back once the elections were done here,” said Lalpuria. “However, the deal moved very quickly. We got a good price, so we were able to engineer that exit.”

The notion of a pick-up in momentum for such exits could be tied to perceptions that India’s larger companies have robust balance sheets and would rather invest in growth than issue dividends.

Some plan to diversify business lines; others want to add digital competencies. These companies are generally considered more price sensitive versus global players, but they have a better view on the market and more levers to pull in terms of integration.

“There was a big drive a few years back by successful Indian companies to try to become bigger in China, the US, and Europe,” BII’s Sinha said. “Given how the markets are right now, many of those companies are pivoting and saying, ‘The next 10 years seems to be a higher growth story here, so let’s just expand in our core market.’ We’re seeing strands of that kind of thinking play out.”

Passing the baton

Global participation in Indian exits is expected to be most visible in sponsor-to-sponsor sales. GPs with large regional funds are presumed to be under pressure to reduce allocations to China, with Japan and India the preferred replacement destinations. Buying from other private equity firms – an established practice in the US and Europe – is seen as a quick and clean way to build exposure.

CX’s Chhachhi predicts that India will see two PE exits north of USD 2bn to regional and global GPs within the quarter. Garg of Asia Alternatives observed that companies backed by numerous domestic minority investors in recent years have matured into globally attractive buyout opportunities. It helps that global managers’ recent India experiences have been positive.

“Most of them are pretty much on top of their cycle because they’re feeling good about the cash flow they’re getting back from these block trades on the public markets,” said one investor.

Global interest is not necessarily tied to GPs tilting regional funds away from China. Apax Partners, which invests in India opportunistically from a global capital pool, has deployed USD 3.5bn in equity in the country since 2008 and currently has a team of 10 investment professionals on the ground.

At the start of the year, the firm sold most of its 4.6% stake in non-bank lender Shriram Finance through a USD 250m block trade near the start of the year. This was followed by the acquisition of a significant minority stake in IBS Software for USD 450m, facilitating an exit for Blackstone, and the sale of medical devices players Healthium to KKR for an undisclosed sum.

Anurag Sud, Apax’s head of India, noted that India is one of the few growth markets globally, so investors must often pay a premium for that growth. However, the firm has tracked increasing opportunities in the historically supply-strained large-cap control space.

“We have seen a marked shift in large ticket deals playing out in India through both founder transitions and sponsor-to-sponsor trades. We plan to double down on our core sectors of tech, health, internet, consumer, and business services,” said Sud.

The Healthium deal, which was fiercely contested, marked the end of a five-year hold that began with a USD 350m acquisition from CX and TPG. While the GPs practiced an active ownership style, they largely relied on existing management. Apax brought in new leadership, drove new product launches and initiated international expansion. Sud believes this left more runway for KKR.

“PE has really changed in this environment, where valuations and interest rates are high, and you really have to drive returns through heavy lifting. That’s where firms like us come in in sponsor-to-sponsor situations,” he said. “The previous owners benefited from some multiple arbitrage, rode the low interest wave, and did some transformation. We could do a larger transformation.”

Secondary solutions

Regional direct secondaries specialist TR Capital sees some of India’s most immediate sponsor-to-sponsor opportunities in the current backlog of IPO candidates.

With the number of domestic listings reaching 234 in 2023, the highest level in six years, TR contends that the market will take time to absorb more names. This could be exacerbated in the post-election glut of listings. TR believes it could invest as much as USD 200m in PE-backed companies in this situation in 2024, providing liquidity when even a hot IPO market cannot oblige.

“DPI [distributions to paid-in] and liquidity have always been an issue in Asia. Even in a market like India where you have quite a lot of appetite right now, there is still a large overhang, where IPOs will happen but not immediately. This leaves a wide room for us to be able to invest in the secondary market,” said Frederic Azemard, a managing partner at the firm.

Secondaries are playing an arguably more prominent role in India through the emergence of continuation vehicles (CVs). The key case study here came last month, when ChrysCapital Partners raised a USD 700m single-asset CV to extend its ownership of National Stock Exchange of India (NSE), while offering a path to liquidity to LPs in one of its earlier funds.

The deal is an outlier in that it features a top-tier GP and a sizeable asset with a dominant market position. Quality was never in question, and so the risk is that it sets an example that cannot be followed.

“It would not be wise to think of this as a status quo transaction,” said a second investor. “Most of the continuation fund activity in India in the past four years has been driven by lower-quality assets and to some extent zombie GPs.”

True North has also tapped the GP-led market, completing a tail-end restructuring of its 2009 vintage fund, which was already into its first extension period. An international secondary investor anchored a vehicle that took on the remaining assets. One-third of existing LPs rolled over into this vehicle, and the rest opted for immediate liquidity.

“One of the core things to remember is if it needs to happen, then it needs to be genuinely at an arm’s length price, and the investors need to genuinely be given an option to take it or not,” said True North’s Sehgal, referencing concerns about conflicts of interest in GP-led secondaries.

“Where you have the option on an as-is basis, I don’t see the downside in it from an LP perspective. If you don’t think the price is fair, you can continue. If you do think it’s fair, you can sell.”

The caveat

Rising interest in secondary strategies could be viewed as a reminder that India’s exit challenges persist even amidst a perceived golden era. This could be exacerbated in the near term by new rules allowing micro and small to medium-sized enterprises (MSMEs) to pursue IPOs.

Most of the MSMEs seduced by the bull market in public listings are not private equity-backed, but they can spoil the party for PE by introducing greater volatility and consequently disappointed retail investors to the equation.

“Many businesses want to list because there will be no strong, active shareholder like us asking questions. The underlying psychology is that it gives them bragging rights and becomes a prestigious thing to accomplish. I don’t think that’s a smart thing to do,” said Lalpuria of Paragon.

“Having investors like us backing them, pushing them, setting systems and processes appropriately and building out the team is better than listing a subscale business.”

It remains unclear if heavy losses among retail investors in MSME IPOs would trigger broader negative market impact. Moreover, regulators aren’t expected to do anything dramatic to upset momentum. But the exuberance currently driving Indian exits and full valuations will eventually abate. The question for investors is: Where will your investments be when the music stops?

“We’re confident this is not going to cool off substantially in the next six months, but there has to be a cooling off at some stage, and when that happens, there will be pain in the market,” said Garg of Asia Alternatives. “If you’re unlucky enough to time your lockup period expiring after the slowdown in the capital markets, that’s going to be an issue. It will delay liquidity by 12-24 months at least.”