PE/VC investments six times more than what IPOs raised in six years

In the past six years private equity and venture capital funds have invested more than six times what corporate India raised through initial public offering (IPOs). Growth in PE-backed companies too has been more than double that of listed entities, finds a study by Venture Intelligence.
Between 2011 and 2016, PE/VC funds invested Rs 426,000 crore in Indian companies, while India Inc raised only Rs 64,000 crore through IPOs.
According to the study, only companies that have reached a certain scale and size are able to successfully tap the public equity markets. Though the government has implemented various initiatives like the SME exchange and trading platforms, they are yet to start making significant impact. In this context, PE-VC investment plays an important role in providing “smart long-term capital” to small and medium size firms.
“We had the idea and the technology skills to build a product, but did not know anything about building a company, including go-to-market, sales, hiring and managing a team, and so on. All those inputs came from the VCs,” finds Phanindra Sama, co-founder of redBus
The revenue growth in PE-backed companies in the past five years has been 40 per cent, while Nifty midcap companies grew 18 per cent, Sensex companies 17 per cent and Nifty companies 17 per cent, finds the study.
PE-VC firms invest in those companies that have high potential for growth. While smaller companies are likely to clock higher growth rates as compared to the larger firms, the growth spread between PE-VC funded companies and benchmark companies is considerable. This indicates an impact beyond the size effect.
A significant characteristic of PE-VC funding is the willingness to provide capital not just for organic growth, but also for growth through inorganic routes such as acquisitions. The five-year asset growth in PE-backed companies too has been more than double at 46 per cent against 17 to 18 per cent in listed entities.
“The common thread that emerges from the study is that PE-VC investment, when chosen and leveraged well, can help companies scale up rapidly and accelerate growth in several ways that add significant value to the Indian economy,” said Arun Natarajan, CEO of Venture Intelligence.
However, the profitability in PE-backed companies have been negative against listed entities. In the five-year period profitability in these firms was lowest – down by 73 per cent while, Sensex and Nifty firms grew their profits by 14 -15 per cent. The firms funded by PE-VC investors are in the growth phase, where the company would have to make significant investments and also incur significant new expenditures. Hence return on assets too has been negative in PE-backed firms.
“The presence of a PE / VC investor provides a kind of certification which, while broadening the equity base, also helps the investee companies access other sources of funding including debt capital. PE/VC investors also forge active partnerships with their investee companies to improve growth and business strategy, besides opening up new opportunities,” said Prof. Thillai Rajan, department of management studies, IIT Madras.