The consumer technology and IT/ITES sectors seem to be the darlings of private equity and venture capital investors. The two segments jointly cornered the bulk of the PE/VC investments made in 2021, amounting to over 60% of the total investment size of $69.8 billion, a recent report released by Bain & Company and IVCA (Indian Venture and Alternate Capital Association) showed.
The IT/ITES space saw investments of as much as $14.2 billion in 2021, growing by a significant $11 billion over the previous year, helped by a handful of big-sized deals worth billions. "In 2021, the sector saw five deals greater than $1 billion in a tremendous increase from the last two years that saw a single-billion dollar deal," analysts at the management consultancy firm said.
The humongous investor appetite for the IT/ITES sector comes on the back of Covid-induced push for digital adoption by industries, lifting demand for IT/ITES services. "This has created increased demand for offshoring and outsourcing, automation and digital, and cloud services. The shifts are expected to last as the world embraces a new normal moving into the endemic phase of the pandemic, and IT promises to provide the backbone of these shifts," say analysts. Valuations in IT saw a steep rise, with large deals in ITES closing at "20-30X EBITDA multiples, much higher than historical multiples of approximately 15X and BPO reaching multiples of 13-14X, growing from the range of about 10X," they add. Notable deals in the sector were Carlyle's $3 billion deal to acquire Hexaware and Blackstone's $2.8 billion Mphasis deal.
The growth in e-commerce, fintech and gaming drove VC funding into the consumer technology space. "The two sectors (consumer tech and IT) represent resilience and attractiveness through uncertainties as business models in these sectors adapted faster than traditional models in other sectors," say analysts. Overall, VC and growth equity shot up by four times to reach nearly $40 billion in 2021, capturing a 55% share of total PE-VC investments. Flight of capital from China due to political uncertainties worked in India’s favour spurring the pace of investments which analysts say grew faster than most major economies in 2021. "The growth helped India increase its share of the overall Asia-Pacific (APAC) market, a signal of trend expected to continue," say analysts.
In fact, even though the prevailing instability of the macro environment has dampened investor sentiment, India managed to attract over $24 billion of PE-VC investments across 630 deals in the first five months of the current year. This compares to about $19 billion of funding received in the year-ago period. Although the count of VC deals have slowed with 20% lesser deals having been recorded this year, the flow of PE deals remains intact. "The average realised cheque size of $168 million this year keeps PE deals within the range of $150-$120 million seen over the last five year," analysts point out.
An important reversal of trend that is expected to last is the dampening of the "vigorous exit activity of 2021 which saw exits grow 4X to $36 billion." This year has seen exit activity of a mere $5.9 billion so far, translating into a 56% decline over last year's PCs over a similar duration. "The exit activity is expected to weaken further. The bearish sentiment in public markets coupled with the younger portfolio of top funds could see exits dip to pre-2021 stages again," say analysts.