Unicorns Becoming Scarcer as Private Equity Deals Decline in Value
The funding winter for unicorns shows no signs of abating as the volume and value of private equity investments continue to decline. Recent data on deals from the September quarter of 2023 reveals a 30% decrease in value, with a total of 40 deals valued at $1.7 billion. Two major private equity players have refrained from investing in India’s startups this year, further contributing to the downward trend.
However, the banking and financial services sector remains resilient in terms of investor interest. During the last quarter, there were a total of 30 private equity deals in this sector, amounting to $566 million. Fintech attracted the most attention in terms of deal volume, although there was a sequential dip in both value and volume. Nevertheless, banking and non-banking institutions accounted for 77% of the overall investments.
According to the Grant Thornton Bharat Financial Services Dealtracker Report, there has been a 23% decline in deal volumes compared to the previous quarter. However, public markets in India continue to outperform other emerging markets in the region. Investors are currently interested in credit-based financial companies that demonstrate strong profitability, although they remain cautious about making new investments until they have more certainty.
Vivek Iyer, Partner and National Leader Financial Services Risk Advisory at Grant Thornton Bharat, emphasized the importance of central banks in maintaining economic stability amid increasing interest rates and global inflation. He also highlighted the evolving investment trend that focuses on primary investments in fintech, banks, and non-banking financial companies where capital drives growth strategy.
It is evident that investors are now prioritizing the profitability and sustainability of business models over growth and valuations. Grant Thornton reports that investors seek clear and achievable paths to profitability.
Mergers and acquisitions (M&A) in India saw 10 deals valued at $1.1 billion. While there was a 9% decline in volumes compared to the previous quarter, values increased by a staggering 2047%. Domestic mergers accounted for 60% of the volumes, while cross-border transactions, particularly in the inbound sector, contributed to 60% of the values. The top deal involved Rapyd Financial Networks Ltd.’s acquisition of PayU Payments Pvt Ltd for $610 million.
In the private equity sector, Grant Thornton’s report indicates growing investor interest in fintech, banking, and non-banking financial company (NBFC) sectors. The last quarter saw a total of 30 deals valued at $566 million, representing declines of 27% and 76% in volume and value, respectively, compared to the previous quarter. Fintech had the most deal volume share at 30%, while banking and NBFC segments dominated in terms of values with a 77% share. The largest deal in the PE landscape was Bain Capital’s investment of $176 million. While private equity funds have been primarily focused on exits, there is a renewed interest in fresh investments, particularly in supporting existing investments and financing expansion initiatives in the evolving financial landscape.
The IPO market saw the launch of two IPOs totaling $186 million, marking a change from the previous quarter’s zero IPOs. Additionally, there were three Qualified Institutional Placements (QIPs) worth an impressive $1.2 billion. The banking sector played a significant role in the QIP market, contributing 54% to the overall values for the quarter. This increase in IPO and QIP activity indicates growing investor appetite and interest in the sector.
Global investors are increasingly attracted to financial services, particularly lending-focused businesses, due to elevated global interest rates. Key areas for credit growth in India include affordable housing, micro, small, and medium enterprises (MSMEs), and education. The insurance sector also holds promise with regulatory changes and the adoption of global standards. However, substantial investments are yet to materialize. Fintech remains attractive, although data privacy influenced by the DPDP Act, 2023, will significantly impact the financial services sector and prompt a re-evaluation of operational strategies, especially for fintech companies.
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