The India growth story – the role of private equity and the 3D reset

The private equity market in India represents a deep, varied opportunity set plugged into many of the sectors catalysing India’s vibrant growth. And while public markets remain dominated by legacy industries, it is private markets where the companies leading India’s growth reside.

India’s private equity industry is rapidly maturing. As capital flows into the market, the pool of private equity management talent has deepened, and grown increasingly specialised. In the coming decades, we expect India to emerge as a genuine global power and believe investors seeking to participate in its rise cannot overlook private equity.

Here we explain the shape of India’s private equity industry today, and how we expect it to evolve. We also dig into why the Indian economy is uniquely positioned to benefit from the themes Schroders Capital expects to shape the next phase of the global economy. Decarbonisation, demographics and deglobalisation – what we collectively call the “3D Reset” – are set to propel the Indian economy to new heights, and the private equity industry will play a crucial role in its progress.

India private equity: Deep, maturing market, with exposure to key growth sectors

The private equity market in India has shown remarkable growth in recent years, with average annual investment volume of approximately $40 billion over the last five years. While there has been a decline in investment volume from the peak in 2021, this is in line with the global post-pandemic normalisation in deal-making activity. Nevertheless, private equity investments in India remain substantial, reflecting the continued interest and confidence of investors in the country's favourable economic conditions and growth potential.

Deal volume has grown by over 4x in the last decade

In the past, the private equity market in India has primarily focused on growth, non-control transactions, while buyouts represented a smaller part of the market. This was due to several factors, including the reluctance of family-owned businesses to engage with private equity firms, limited availability of managerial talent, and regulatory constraints on acquisition debt financing.

However, there has been a notable shift over the last decade, with the share of buyout transactions increasing from just 5% of investments in 2010 to 19% of investments in 2022. Control deals, involving collaboration with family-owned businesses, are gaining momentum as successful outcomes have been achieved. Furthermore, the Indian corporate ecosystem has matured, resulting in greater availability of managerial talent both domestically and globally.

India’s private equity market is mostly growth-stage, yet buyouts are on the rise

Venture Capital also represents a meaningful share of private equity activity. India has a vibrant start-up ecosystem, home to the third highest number of unicorns globally. This is driven by a culture of entrepreneurship, high-skilled talent, and rapid digital adoption. Indian startups are global leaders in enterprise software and fintech. They are also making strides in emerging deep tech areas such as space tech, an industry that has seen a surge in activity following India’s recent moon rover landing.

Most of India’s fast-growing private companies operate in precisely the sectors that stand to benefit from India’s growth trajectory, for example, consumer, healthcare, and technology. India’s public markets, conversely, are dominated by older companies in traditional sectors. Financial Services and Industrials represent 70% of the S&P BSE SENSEX market capitalisation while Consumer & Retail and Technology represent almost 60% of private equity deal volume.

Fast-growing sectors dominate private equity while legacy sectors prevail in private markets

Some investors cite concern about the availability of exit strategies for private-equity-backed companies in India. However, there have been a broad mix of exit channels. In 2022, 30% of exits were to strategic buyers, 40% to private equity buyers, and 30% through IPOs. The strong representation of IPOs reflects the recent easing of capital market regulations aimed at encouraging listings from companies on the path to profitability. We expect the diversity in exit types to continue, bolstered by an expanding investor base, further lifting of IPO listing restrictions, and strong interest from global corporates.

The most active private equity firms in India are global firms investing via regional rather than dedicated India funds. However, fundraising from dedicated India funds has quadrupled over the last decade, growing from $1.9 billion in 2012 to $8.0 billion in 2022. The average fund size has also increased from $86 million in 2012 to $160 million in 2022. Today, there are more than 200 private equity firms investing from dedicated India funds.

There has also been heightened interest from investors in Indian rupee denominated investments. Total AUM held by Category II Alternative Investment Funds (AIFs) grew by 45% year-on-year in 2022, highlighting the growing appeal amongst local investors for local onshore regulated structures. AIFs are a type of pooled investment vehicle incorporated in India, investing in alternative assets. Category II AIFs consist of private equity, private credit, and real estate funds. We expect India to follow China’s trajectory of substantial growth of the local market. The impressive growth of RMB denominated fundraising, which in 2022 totalled $300 billion, serves as a compelling indicator of the potential scale that India’s local market could achieve.

The 3D Reset and technology revolution create tailwinds in India

The global themes of decarbonisation, deglobalisation, demographic change, and the ongoing technology revolution continue to create challenges as well as opportunities across the spectrum of private asset investments. India is benefitting from these secular shifts. India has a young and growing population, its strong manufacturing base is attracting global corporations as a key China plus one partner, and the government is leaning into the energy transition with generous support for clean energy initiatives.

These are just some of the factors driving India’s projected ascent to become the third largest economy by 2028 with expected growth of 7% per annum. Consumer, tech-enabled business services, and healthcare are at the forefront of this growth, and private equity’s strong focus on these sectors makes it an attractive way to participate in India’s transformation.

The rise of the Indian consumer

While most large economies are grappling with demographic trends of population decline and labour shortages, India has attractive demographics with a median age of just 29 and a highly skilled and digitally enabled population. India’s GDP is expected to reach $6 trillion by 2030 and private consumption contributes roughly 60% of GDP, indicating a sizeable opportunity for consumer-focused companies. Furthermore, with online penetration in retail under 10%, there is significant white space for retail growth, especially with the rise of digital payments, improved digital accessibility, and a growing middle class.

Case study: Consumer sector

Schroders Capital made a direct investment in India's leading eyewear company in 2016. Since the investment, the company has scaled in India and beyond, tapping consumers in Asia and the Middle East. With rising digital adoption, the company has boosted its online presence while also expanding its retail footprint, evolving into an omnichannel player. Its store count has grown from 100 to more than 1,500 stores globally. Furthermore, by investing in manufacturing capacity and operational efficiencies, the company has increased sales of its own products, driving higher profit margins.

The opportunity in India’s long history as a tech enabled market leader

The IT sector has long been a vital part of India's economy. India has a tech workforce 10 times larger than that of the US and each year adds 10 million graduates to its talent pool. The trends of demographic change, deglobalisation, and decarbonisation have fuelled India's technology industry, especially in areas such as fintech and B2B marketplaces.

India is the third largest fintech market, surpassed only by the US and China. The catalyst for fintech innovation has been the rapid growth in mobile usage. This is underpinned by some of the world's lowest data rates, and world-leading digital infrastructure such as biometric digital IDs (Aadhaar) and instant real-time payments (Unified Payments Interface). Although payments initially drove this momentum, innovations in lending, wealth-tech, and blockchain technologies have also emerged.

Deglobalisation tendencies have raised India's status as a key global manufacturing hub. This shift is exemplified by the 'Make in India iPhone era', with an anticipated 25% of Apple’s iPhone production moving to India. But with this expansion in manufacturing, the demand for efficient supply chain management tools has increased. This has led to the emergence of digital-first B2B marketplaces that foster greater transparency, quality control, and efficient supply-demand matching.

There has also been substantial innovation in climate technologies, particularly in renewable energy and electric mobility. India will need to significantly expand its solar and wind capacity, requiring investments in equipment and components such as wind turbines, solar photovoltaic modules, and storage batteries. Two-wheelers have been a particular focus for innovation, as they account for 70% of vehicles in India, yet only 4% of them are currently electrified.

Case study: Tech enabled business services

Schroders Capital backed one of India’s leading B2B managed marketplaces in 2019, addressing the demand for efficient supply chain tools amid rapid economic growth. The company is transforming supply chain operations for SMEs through two core services. Its digital vendor management platform streamlines raw material procurement workflows, including order placement, invoicing, and real-time fulfilment tracking.

It also offers embedded financing, linking SMEs to lenders and providing analytics to inform credit scoring. Since inception in 2016, the company has expanded the marketplace to 500 enterprise customers and 8,000 vendors. It has also diversified into new industries and enhanced its analytics with AI.

Healthcare in India will be driven by private equity

The Indian healthcare sector is poised for growth, offering attractive opportunities for private capital. Healthcare delivery remains underserved, characterised by low insurance adoption, low public spending, insufficient infrastructure, and a lack of doctors.

Innovations such as telemedicine, insurtech, and AI-based diagnostics have emerged to solve some of these challenges, enabled by the digitisation of health records and cheap access to data. Healthcare spending is set for rapid growth over the coming years, presenting opportunities both in traditional market-leaders and digital-first business models.

The pharmaceuticals sector also shows strong potential for growth. India is a global leader in generics and vaccine manufacturing, accounting for 20% of global generic medicine exports and 60% of global vaccines production, according to research by Invest India. Growth tailwinds include the large and growing talent pool, diversification in supply chains away from China, and regulatory enablers such as Production Linked Incentives and the National Biopharma Mission. There is also vast potential for digitisation in pharma manufacturing, such as the use of AI in drug development.

Case study: Healthcare

Schroders Capital invested in one of India’s largest pharmaceutical contract development and manufacturing (CDMO) companies in 2021. The global CDMO market, which represents a $140 billion opportunity, is projected to grow at 6.9% over the next few years, according to Grand View Research. Indian CDMO players are well-positioned to capture this growth due to a large population for clinical trials and availability of technical expertise at competitive rates.

The company specialises in topical semi-solid formulations, which is a segment with high regulatory and technical entry barriers. Since the investment, the company has forward integrated into proprietary formulations, securing more than 21 US Abbreviated New Drug Applications (ANDA) approvals, and has established a front-end presence in the US and India. The company has also strengthened its R&D capabilities through expanding from generics to specialty topical products.

Improving diversification with an India private equity strategy

In addition to the attractive return potential, an India private equity strategy has been shown to add diversification to a global private equity portfolio.

We analysed investment results across our global private equity strategies. Interestingly, India private equity exhibited by far the lowest correlation, with a correlation coefficient of only 0.14 when compared for example to our Europe private equity strategy.

What leads our India private equity strategy to exhibit low correlation? India’s low export dependency and large domestic market cause company performance to be more closely tied to India’s intrinsic economic performance than the global macroeconomic cycle. Furthermore, our private equity strategy in India focuses on the growth stage, which is typically less export-dependent and uses less leverage. Performance is driven predominantly by winning local market share, product extension, and operational efficiencies.

An allocation to India private equity adds diversification

Conclusion

India's vibrant growth story, driven by demographic advantages, digital adoption, and a thriving entrepreneurial ecosystem, offers a compelling opportunity for private equity investment. The maturing private equity market, deeply embedded in sectors fuelling India's growth, provides a strong platform to access this potential. The country's ability to effectively harness the 3D Reset is set to boost its economy and private equity industry. By focusing on high growth sectors such as consumer, tech-enabled business services, and healthcare, we believe an investment strategy focused on India is not only attractive but also adds valuable diversification to a private equity portfolio.