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Global Outlook

Funding Background – Overview 2017

The global upswing in economic activity continued in 2017, with global GDP growth rising to 3.2%, led by the US and the EU. Broad-based upward revisions of economic growth parameters in Western Europe, Japan, emerging Asia and Russia more than offset downward revisions for the US and the UK. Growth in Western Europe and EU bounced back, but the recovery is not complete: While the outlook is strengthening, growth remains weak in many countries, and inflation is below target in most of the advanced economies.


The annual rate of inflation, based on the monthly WPI, stood at 3.93% for the month of November 2017 (over November 2016). The rupee appreciated in value vs. the US dollar, whose strength declined due to delays in healthcare and tax reform in the US and, in parallel, the growing strength of the euro.
India's central bank, the Reserve Bank of India (RBI), pared the rate at which it lends overnight money to banks from 8% three years ago to 6% during 2017. Despite consumer price inflation dipping below 4%, the RBI held off drastic rate cuts. India's foreign exchange reserves were $404.92 billion in the week prior to December 22, 2017, which had steadily increased from $359.67 billion a year ago, according to data from the RBI.
Several developments in India had positive effects on the economy in 2017. The government's fiscal deficit, which was 4.5% of the gross domestic product (GDP) in 2013 to 2014, steadily declined to 3.5% in 2016 to 2017 and is expected to further decrease to 3.2% of the GDP in 2017 to 2018, according to the RBI.
A broader tax base and improved spending efficiency helped narrow the budget deficit. The Fiscal Responsibility and Budget Management (FRBM) review committee proposed a new FRBM Act to improve fiscal accountability and transparency. The report recommends lowering the fiscal deficit to 2.5% of GDP by 2023.
India's revenue receipts are estimated to reach INR 28–30 trillion ($436–$467 billion) by 2019, owing to the government of India's measures to strengthen infrastructure and implement reforms, which include demonetisation and the Goods and Services Tax (GST). The Indian government's Union Cabinet approved the Central Goods and Services Tax (CGST) Bill, Integrated Goods and Services Tax (IGST) Bill, Union Territory Goods and Services Tax (UTGST) Bill and Goods and Services Tax (Compensation to the States) Bill 2017.
The unification of taxation under the new GST is supposed to be a uniform process with centralised registration that will make starting and expanding businesses simpler. Interstate movement of goods and services will become cheaper and less time consuming. The government also provided tax breaks for small- and medium-sized enterprises (SMEs) with revenues less than INR 50 crore.
Demonetisation has led to more digital transactions. A unique identification scheme (Aadhaar) is gradually allowing better fund tracking. A direct benefit transfer (DBT) system will improve accountability and curb the black market for subsidised goods. The government of India has saved $10 billion in subsidies through direct benefit transfers with the use of technology, Aadhaar and bank accounts, according to a statement given by Prime Minister NarendraModi during his address at the Global Conference on Cyber Space in November 2017.
Heightened financial sector risks related to the concentration of bad loans in public sector banks was a big concern for India. According to RBI's latest Financial Stability Report, the gross nonperforming advances (GNPA) ratio of banks increased from 9.6% to 10.2% between March and September 2017. The GNPA of banks in India may increase to 10.8% by March 2018 and further to 11.1% by September 2018, per the RBI report. China, Brazil and South Africa all have GNPA ratios below 4%, a number considered a safe zone.
The government of India invested $32.4 billion to recapitalise public sector banks over the next two years. The government's bank recapitalisation plan is expected not only to uplift lending and investment in the country, but also to push credit growth in the country to 15%.
In addition to the improvement of the economic scenario, there were several investments in various sectors of the economy. The M&A activity in India increased 53.3% to $77.6 billion in 2017 while private equity (PE) deals reached $24.4 billion. Indian companies raised INR 1.6 trillion ($24.96 billion) through the primary market in 2017. India received net investments of $17.412 million from FIIs between April and October 2017.
These moves have led to higher investor confidence, reflected by India's improved rank in the World Bank's "ease of doing business" category. India moved up 30 places and is now among the top 100 countries. Moody's upgraded India's sovereign rating for the first time in 14 years—to Baa2 with a stable economic outlook.
Including add-on transactions, global buyout value grew 19%, to $440 billion, supported by a stream of large public-to-private deals. However, global deal count was essentially flat, growing just 2%, to 3,077 deals. That's off 19% from 2014, the high-water mark for deal activity in the current economic cycle.
Two record-setting deals in Asia marked a big year for private equity-backed deal activity in 2017 in the region. Investors led a surge of megadeals ($1 billion or more) including the region's largest deal ever—a $14.7 billion buyout of Toshiba Memory Corp. by a group of investors led by Bain Capital and others.

 The third-largest deal occurred in Singapore, where multiple investors acquired Global Logistic Properties Limited for $12 billion. These two deals alone have produced the record-breaking total, accounting for more than half of all Asian buyout deal value in 2017.
Asian private equity deals continue to offer strong growth, with favourable demographics and a growing middle class that leads the demand across sectors. The Asian market gives investors an opportunity to diversify portfolios away from traditional US and European markets.

The global private equity industry raised a record $452 billion from buyout funds alone in 2017, giving it more than $1 trillion surplus to pour into companies and new business ventures according to data from industry tracker Preqin, the leading source of data and intelligence for the alternative assets industry.
In 2017, Asia-Pacific-focused fund-raising levels recovered to 2015 levels of approximately $66 billion, growing by 6.3% from 2016. India was among the leaders of that growth, with India-focused funds growing by 48% to an aggregate $5.7 billion in funds raised. In terms of returns, LPs have been cash-positive since 2013, and the Asia-Pacific private equity industry has been consistently outperforming public markets.
Deal making

India remained a hotbed for deal making in 2017. The total deal value in India during 2017 was $26.4 billion, the highest in the last 10 years. While the number of deals fell 30% in 2017 to 682 from 976 in 2016, in terms of value, a few large deals in 2017 increased the deal value almost 60% over the previous year.
In fact, the top 15 deals in 2017 accounted for almost half of total PE deal value. In 2016, the top 15 deals were worth only 30% of the total deal value. Clearly, the PE funds value quality over quantity and are not allowing dry powder to pile up.
Indeed, the number of active players in PE increased—particularly institutional investors. The number of active players in the Indian market increased from 474 between 2014 and 2016 to 491 during the 2015 to 2016 period, mainly due to the increase in institutional investors.
As in previous years, early- and growth-stage investments continue to be the most dominant stages of investment, contributing to nearly 80% of the total number of deals. Majority deals by value declined in 2017 to 2015 levels of less than 20%. However, investors in minority deals still seem to be interested in getting a "path to control" for key decisions.
The top priority for funds in 2018 will be making new deals. Funds expect BFSI and consumer products and retail to see maximum investment activity in 2018. Investors feel that the current valuations are high, but they expect a slowdown in 2018.

Exits and portfolio management

Investments and exits in India had a strong 2017, surpassing their respective previous highs. Exit momentum continued to be robust, indicating healthy and strong public markets in India. Initial public offerings (IPOs) are the primary exit mode in India. More than 200 exits took place in 2017. The exit values for 2017 grew by approximately 60% over 2016 to almost $16 billion.
The number of exits increased by only 7% to 211 compared with 197 in 2016, but big-ticket deals like Bharti Airtel, Flipkart, GlobalLogic and ICICI Lombard powered that increase. The top 10 exits alone in 2017 accounted for almost 40% of the total exit value.
There was a marked increase in the number of public market sales, including IPOs, which rose from 45% in 2016 to 50% in 2017, suggesting confidence in the Indian market. Consumer tech and BFSI were key sectors for this activity, thanks to exits by Tiger Global ($1.3 billion), SAIF Partners ($0.82 billion) and Fairfax (~$1 billion); telecom saw one large exit (~$1.4 billion) by Qatar Foundation Endowment.
Considering the way India's economy is poised for growth in the coming year, with capital markets on an upswing, we expect many more exits in the next few months. However, fund houses Bain spoke with believe that the number of secondary and strategic sales will increase. But a mismatch in valuation expectations and maintaining high-level returns could hinder exits, according to funds with whom we spoke.

Overall, 2017 was a good year for private equity in India. The year saw $26 billion of PE/VC investments in India—the highest ever and a 60% increase from 2016. Mega deals were the bulk of the investments; the top 10 players were involved in almost two-thirds of the deals by value this year. Consumer technology and BFSI sectors were the primary interest for private equity and venture capital in 2017. Fund sources continued to diversify: Sovereign wealth funds and pension funds participated in about 20% of the total deal value. New asset classes, which include alternative investment funds, continued to scale. Competitive intensity in the market grows as the number of funds increases, including an increase in institutional investors. Exits continued on an upward trajectory, driven by consumer tech and telecom. Most funds expect a moderation in valuations and returns to decline by 2% to 4% in the coming three to five years.



Macroeconomic overview

    • 2017 showed signs of recovery from 2016. The growth rate of US and Eurozone economies increased due to notable pickups in investment, trade and industrial production, coupled with stronger business and consumer confidence.
    • India and China continued to maintain healthy growth rates of about 7%, similar to 2016.
    • India's GDP growth remained stable at a rate of 7.1%, driven by services and continued growth in manufacturing.
    • Inflation remained in the 3% to 5% range. Indian currency appreciated vs. the US dollar, in line with developing currencies, and treasury bill yields rose due to expectations of higher fiscal deficits.
    • Investor confidence in India grew as a result of regulatory action and government stimulus to address nonperforming assets (NPAs) and a growing formal economy coupled with unification of taxation under the new GST.


    Source: - Bain & Company (Global Private Equity Report 2016)