3 Key Growth Segments In the Indian Private Equity Market According to international private equity expert and technologist Ankit Kumar, with India expected to cross $5 trillion in GDP in the coming years, several of these sectors will continue to gain scale and grow fast

The last decade has seen private equity investing truly come of age in India. The number of funds in India has grown to over 300 from just 75 in 2010. These funds are also increasingly more active, deploying almost $250 billion of capital in the last decade, more than three times the amount of capital deployed in the decade before that.

According to San Francisco based international private equity expert and technologist Ankit Kumar: "The growth in Indian private equity has been quite remarkable and is supported by three fundamental structural changes which are here to stay. First, as the GDP approaches $3 trillion, more sectors are achieving scale. Second, there has been a change in promoter mind-set where they are more open to giving control to private equity firms. Since these firms are traditionally more comfortable with this model, this has led to an increase in investments. Finally, the lack of exits was a big overhang, but this has started to change – in fact about half of all historical exits have taken place in the past 3-4 years."

So which sectors are getting the most interest? One can broadly classify them into three groups:

Tried and Tested: IT Services, Pharmaceuticals and Industrials

Three sectors—IT services, pharmaceuticals and industrials—constitute about 35-40 per cent of all private equity investments in India. Kumar states: "Given the domestic market has come of age fairly recently, the historical focus has been on export-oriented sectors. IT Services and BPO sector has been at the center of this given its large US customer base, good management teams, solid regulatory framework, as well as, a need for the sector to transform from traditional low-value maintenance services to new-age digital services and the opportunity to implement technologies such as robotic process automation to increase productivity"

As is to be expected, deal activity has been raging with several multi-billion dollar deals completed in recent years including the acquisition of CitiusTech by BPEA and the successful exit of Bain Capital's investment in Genpact.

The pharma sector provides opportunities as there are segments where India has the largest global supply base, there are high barriers to entry, and there is an opportunity to add customers and obtain regulatory approvals for new products, especially in the US. As per Kumar: "Pharma has provided good exits. KKR's Gland Pharma deal is a good example where capital was critical in expanding manufacturing capacity and getting new products through FDA approvals. There is also healthy interest from multinationals like Abbott and Mylan which provides good exit options."

The industrials sector is also generating a lot of interest with Blackstone's investment in Essel Propack and Warburg Pincus' investment in Alliance Tire being recent examples. "Industrials are interesting. There are niches where there are a handful of high-quality companies of scale and several sub-scale providers....this creates opportunities to execute a consolidation play, build a global player, add to the top-line by expanding into new markets and achieve productivity improvements by implementing lean," said Kumar.

Emerging Sectors: Financial Services and Consumer

With the rise of disposable incomes, there is an increasing focus on investing in businesses that serve the Indian consumer. Financial services and consumer goods have been responsible for almost half of the investments in recent years.

Examples of recent deals include Blackstone's acquisition of Aadhar, Warburg Pincus' acquisition of Avanse, CDPQ's investment in ECL Finance, TPG's partnership with Landmark, and Kedaara Capital's capital infusion into Lenskart.

"Housing and food represent almost 50% of consumer spending in India, so we expect continued growth in these sectors. However, investors need to be almost over-cautious on due diligence. The NBFC segment especially - it serves a critical consumer need…..but in lending and insurance you need to balance growth with maintaining underwriting standards – made very clear by the recent issues plaguing the sector," Kumar adds.

Nascent: Logistics

One promising sector expected to grow exponentially is logistics. Warburg Pincus, Blackstone and Partners Group have been especially active with investments in Ecom Express, Embassy, and Allcargo. Other investors of note include Everstone, GLP, Temasek and CPPIB.

According to Kumar: "Rise in consumer spending is driving demand for offline and online retail. Logistics is a critical backbone and needs to be upgraded and expanded. This is driving increased investment. Initiatives such as GST have opened up a national logistics market which will drive significant consolidation and attract sophisticated players. There will be continued demand for investment in capital intensive warehousing as well as asset-light services and software."

With India expected to cross $5 trillion in GDP in the coming years, several of these sectors will continue to gain scale and grow fast. The private equity industry, with its plentiful dry powder is likely to be at the forefront of enabling this growth - providing critical capital to these sectors and to the overall Indian economy.