India's AIF Landscape Surges Towards Maturity: Bright Prospects Ahead

India's AIF Landscape Surges Towards Maturity: Bright Prospects Ahead
David Wilton, Chief Investment Officer (CIO) of Oister Global
17 May 2024

In the rapidly evolving landscape of India's venture capital (VC) and private equity (PE) markets, Oister Global stands out as a key player, leveraging its expertise to navigate and capitalize on emerging opportunities. As an institution focused on channeling investments into the Indian VC/PE ecosystem, Oister is fueling innovation and growth across various sectors. In this exclusive email interaction attributed to David Wilton, Chief Investment Officer (CIO) of Oister Global, we delve into the current state and future prospects of the Indian AIF segment.

1) The Indian AIF landscape has seen significant growth in recent years. How would you characterize the current state of maturity in the VC/PE segment?

The Indian market now has scale, with ~100 Billion USD (2023) AUM across all stages (although this is smaller than the North America and Chinese markets with 4400 Billion USD (2023) and 1600 Billion USD (2022) AUM, respectively). Over 40 GPs have raised three or more funds, indicating both depth of experience and sustained success. The joint Oister/CRISIL report “No ifs about AIFs'' provides analysis showing that the Indian private market has consistently outperformed the Indian public market, with an alpha of 13.5% as of March 2023, a result that could come only from a mature private market ecosystem.

2) Given that some of the market’s previous favorite VC-backed companies are facing down rounds, is now a good time to invest in Indian VC/PE?

Now is a good time to invest in Indian VC/PE.

Currently, there is more discipline in pricing and no FOMO. This helps investors in two ways. The obvious one is lower entry valuations, which improve the odds of attractive future returns. The less obvious but possibly more important reason is the balance of influence is now in favor of investors rather than founders, which gives GPs greater ability to influence the direction of companies and gives early-stage investors more protection against the possibility of founders agreeing terms with late-stage investors which disadvantage early-stage investors. The lack of FOMO works in favor of the type of GP preferred by Oister, who win deals based on the desire of founders to work with them rather than winning on price.

Also, as India has the most attractive VC/PE market outside of the developed markets, the market is very likely to attract increasing flows of foreign capital in the future, which will create exit opportunities for the current vintage of funds.

3) The Indian public market has been strong over the last several years, and in particular, the number of SME IPOs has picked up since 2021. What implications does this have for the private markets?

IPOs are likely to become a more accessible and frequent exit route in the Indian private market, which will accelerate the rate at which DPI (Distributed to Paid-In Capital) accrues. On the demand side, the Indian public market is buoyant and welcoming to new issues, and we believe that supply will increase to meet demand. In previous years, founders have had an incentive to stay private longer, delaying liquidity for investors, and we believe that this incentive has diminished.

The incentive to remain private was an effect of FOMO in which to win deals GPs gave more power to founders, and this created a larger gap between the controls and discipline imposed by the private market versus the public market. The greater freedom of the private market relative to the public market encouraged founders to stay private for longer. The discipline gap is now smaller, and the IPO window is open, a combination that will encourage more companies to go public earlier.

4) The Indian private market has come a long way in the last decade. Does it have staying power, or has it run its course?

The growth and maturation of the Indian private market in the last decade has been made possible by a range of government policies that both stimulate economic growth generally and encourage innovation in particular.

Measures such as GST and expanding roads and airports have reduced internal barriers to commerce and created a more integrated market. The expansion of digital public infrastructure from identity verification (eSign, DigiLocker) to payments (Aadhaar Payment Bridge System, Unified Payments Interface) and data sharing (Open Credit Enablement Network) has created opportunities for innovation to reach a wider consumer base across multiple sectors.

Add to this India’s demographics, and you have a powerful combination that will, for many years to come, support the creation of large numbers of the types of opportunities that are attractive to VC and PE investors.

The growth of India’s private markets is an opportunity with long legs, not a flash in the pan.

5) The Indian private market looks exciting from the inside. How does it look from the outside?

It is not an exaggeration to say that the Indian private market is the sole bright spot, and certainly the major bright spot, across emerging market private markets. The reason for this is that India is the only country to have such a strong combination of policies that improve market efficiencies, initiatives that promote innovation, and strong demographics, all of which, in combination, create a rich deal flow for VC and PE.

To this can be added the steps taken by the regulator, SEBI, to increase transparency and trust.

Offshore investors are showing interest in the Indian private market opportunity, but they are likely to respond more slowly than local investors for reasons including attractive returns in their home markets, lack of familiarity with the Indian private market, and large investors with substantial minimum commitment sizes who encounter a problem in the smaller size of many Indian funds compared to the funds in which they invest in their home markets or have invested with until recently in China. The eventual arrival of larger amounts of foreign capital is likely to create an attractive exit environment for the current vintage of funds.


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