CRISIL, a leading global analytics company, and Oister Global, a leading investor in Indian private equity (PE) and venture capital (VC) funds space, have launched a report analysing deals across the PE-VC markets in India over the past decade, and the performance of alternate investment funds (AIFs) across equity categories.

India is now home to more than 112,000 start-ups (data as of October 3, 2023), making it the third-largest such ecosystem in the world.

On their part, PEs and VCs have gone well beyond Tier I cities, as evidenced by transactions from such geographies surging 220x in a decade from Rs 31.8 crore in fiscal 2013 to Rs 7,100 crore in fiscal 2023.

Says Rohit Bhayana, Co-CEO and Founder, Oister Global, “In fiscal 2022, India was a beacon of hope amid the global capital market slowdown. Despite the so-called funding winter, annual PE and VC investments in the country soared to an all-time high. The resilience of the domestic entrepreneurial ecosystem and significant strategic exits show the extent of opportunity. These have defined India as an enduring destination for transformative investments."

AIFs have played a pivotal role in shaping PE-VC deal activities in India. The report underscores their rapid growth in the past decade. As many as two-thirds of the current lot of 1,096 were registered in just the past five years as of March 2023.

Total commitments have seen an astronomical 580x rise in the past ten years - from Rs 1,437 crore in 2013 to Rs 833,774 crore in March 2023.

AIFs are expected to remain one of the fastest-growing managed product categories over the next few years as more and more high-net-worth individuals (HNIs) and ultra-HNIs seek differentiated products that give them an option to generate better positive alpha on their investments.

The report includes performance comparison of aggregate AIF benchmarks including Category I and II equity funds that invest purely in unlisted securities belonging to vintage years fiscal 2013 to 2022, with corresponding public market equivalent (PME) values (using the S&P BSE Sensex TRI).

While the public markets in India have done very well during this period, the AIF benchmarks mentioned above have outperformed the S&P BSE Sensex (public market equivalent) by generating an internal rate of return (IRR) alpha of 13.5% as of March 2023. This outperformance is not limited to a handful of funds - over 75% of them in the benchmark have generated a positive alpha.

While the IRR for the aggregated AIF benchmark stands at 25.76% as of March 2023, the ratio of total distributions to paid-in capital - which denotes realised gains - remains low. The ability of fund managers to make timely exits from their portfolio companies at favourable valuations will determine the investor experience with these products.

Says Jiju Vidyadharan, Senior Director, CRISIL Market Intelligence & Analytics, “The AIF industry is still evolving so, apart from performance, it is equally important to focus on the quality of investment and the risk control processes, standardisation of valuation practices and the overall governance architecture when leveraging the abundant opportunities available for investment. Sharp focus on improving transparency will be one of the important enablers of the industry’s growth. India’s strong economic situation, burgeoning entrepreneurship, expanding consumer base, rapid digital adoption, supportive regulatory environment and government initiatives will provide the foundation for growth.’’

A strong positive alpha, rapidly evolving PE-VC landscape, increasing investment opportunities beyond Tier I cities and supply surplus from the booming start-up culture will ensure there is ample ‘Atmanirbhar capital for an Atmanirbhar Bharat’.