Worry about an impending $eluge?

Synopsis

Global private equity firms are amassing huge funds for India. However, disruptions in tech and lending sectors, coupled with high valuations, present significant hurdles. With competition intensifying, these firms must reassess their return expectations. Many may need to shift focus geographically or seek out distressed assets as the investment landscape becomes more challenging.

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Earlier this month, PE firm EQT's $15.6 bn Asia-focused buyout fund - one of the largest ever - makes the concentration of capital among a handful of fund management firms staggering. And scary. Between Blackstone, Bain, KKR and EQT, a cool $50 bn is waiting to be deployed. Some bulge-bracket shops are still on the road to raise even more money. On a conservative basis, most allocate at least a third of their total regional corpus to India. That means each of the four firms needs to invest $5 bn. This dollar deluge may end up drowning many.

PE suits have historically been among the largest contributors to FDI into India. But their portfolio construction has been heavily reliant on tech services and lending. Significant disruptions in both have made alpha creation in these sectors near-impossible. AI's shattering Saas enterprises. PE tech deals of 2021-25, done with valuations 20x-plus Ebitda, are mostly underwater. In NBFCs, RBI is coming down heavily on PE firms owning large chunks of two lending entities. Unless obsolescence, or volumes, drives consolidation, buyout opportunities will remain limited. But the bigger worry remains that private market valuations remain anchored to public markets, which are still overheated across large swathes of consumption and investment themes. As excess liquidity starts chasing a shrinking pie of good prospects, the competitive landscape will become even more combative as family offices also get in the fray.

Instead of bespoke bilateral deals, auctions are now de rigueur in sectors like hospitals and manufacturing, as entrepreneurs are busy playing one fund against the other to max value. So, global funds must recalibrate their expectations of underwriting 22-25% returns, especially when rupee's in free fall. Many will have to pivot geographically. Others will hunt for broken transactions that will return to market as the IPO door will shut for several companies. For all those aggregating AUMs for their next fund and the one after, India's PE party needs a close, hard look.

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