Title: Private Equity Investments in Indian Startups Decline in Q3 2023
Subtitle: Investor Preference Shifts Towards Profitable Financial Services Sector
by Pierre Herubel, SEO Expert and High-end Writer
The Indian startup ecosystem experienced a significant decline in private equity investments during the third quarter of 2023. With prominent players refraining from funding startups, the volume and value of deals have both witnessed a downturn. A total of 40 deals, valued at $1.7 billion, were recorded in Q3, marking a 30% decrease in value compared to the previous quarter. Private equity investors are presently focused on exits rather than exploring new business opportunities.
However, amidst the overall decline, the banking and financial services sector remains attractive to investors. During the same period, a total of 30 private equity deals, worth $566 million, were executed in the sector. Fintech emerged as a significant player, contributing to 30% of the deal volumes, although a sequential decline was observed in terms of value and volume. Banking and non-banking financial companies (NBFCs) dominated the investment landscape, accounting for a 77% share in overall investments.
According to the Grant Thornton Bharat Financial Services Dealtracker Report, volumes in the private market experienced a 23% decline compared to the previous quarter’s 52 deals. However, India continues to outperform other emerging markets in public markets. The report highlights that investors are displaying interest in credit-based financial companies with strong profitability indicators. Nevertheless, they remain cautious about making new investments until they gain more confidence in the market.
Vivek Iyer, Partner and National Leader of Financial Services Risk Advisory at Grant Thornton Bharat, stated that central banks’ balancing act is crucial in maintaining economic stability amidst increasing interest rates and global inflation. The recent pause in interest rate hikes by India’s monetary policy meetings reflects a cautious approach given global uncertainties. He further emphasized the evolving investment trend, with private equity funds primarily focusing on primary investments in fintech, banks, and NBFCs, particularly in areas where capital drives growth strategy.
Investors have shifted their focus to the profitability and sustainability of business models. According to Grant Thornton, growth and valuations are no longer the main drivers for investment decisions. Investors now seek clear and achievable paths to profitability.
Moving to the mergers and acquisitions (M&A) landscape, there were 10 deals worth $1.1 billion during the quarter. Although volumes saw a 9% decline compared to the previous quarter, values experienced a significant upsurge of 2047%. Domestic mergers accounted for 60% of the volumes, while cross-border transactions, particularly in the inbound sector, contributed to 60% of the M&A values. The top deal was Rapyd Financial Networks Ltd.’s acquisition of PayU Payments Pvt Ltd for $610 million.
In terms of private equity, the Grant Thornton report indicates a growing interest in fintech, banking, and non-banking financial company (NBFC) sectors. A total of 30 deals, valued at $566 million, were executed in Q3, with fintech capturing 30% of the deal volumes. However, banking and NBFC segments dominated in terms of values, accounting for a 77% share. The largest single deal was Bain Capital’s investment of $176 million. While private equity funds have been actively focusing on exit strategies, there is a renewed interest in fresh investments, particularly in strengthening existing positions and financing expansion initiatives in the evolving financial landscape.
The quarter marked a positive shift in initial public offering (IPO) activities, with two IPOs collectively valued at $186 million. Additionally, three Qualified Institutional Placements (QIPs) raised an impressive $1.2 billion. Notably, the banking sector played a dominant role in the QIP market, contributing 54% to the overall QIP values for the quarter. This upswing in IPO and QIP activity reflects growing investor appetite for the sector’s offerings.
Global investors are displaying increased interest in financial services, particularly lending-focused businesses, driven by 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 is also poised for growth due to regulatory changes and the adoption of global standards. However, substantial investments are yet to be seen. Fintech companies remain attractive to investors, but data privacy regulations imposed by the DPDP Act, 2023, will significantly impact the financial services sector, prompting a re-evaluation of operational strategies.
As the Indian startup ecosystem experiences a funding winter, private equity investments in the sector continue to decline. Nevertheless, investor interest remains steady in the banking and financial services sector, driven by profitable opportunities. The evolving investment landscape emphasizes the importance of prioritizing profitability, sustainability, and clear growth strategies for businesses seeking investments in India.
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