PE/VC investors are still bullish about the 'India story'; here's why

Amid the slowdown in global capital markets in 2022, India emerged as a beacon of hope. Even though ‘funding winter’ became the operative word in most circles, private equity (PE) and venture capital (VC) investments in India surpassed $50 billion, accounting for 60 per cent of all FDI inflows last year, per the Indian Venture and Alternate Capital Association (IVCA). Private investors pumped capital into sectors like fintech, SaaS, real estate, climate tech and more.

“PE/VC funds... have demonstrated outstanding fiduciary responsibility in the past year,” says Rajat Tandon, President of IVCA. The year was also defined by the rise of alternative financing options like venture debt. Nearly $1 billion worth of debt capital is being deployed in India annually, per consulting firm BCG. It could reach $6-7 billion by 2030 as new economy firms are opting for debt because it is cheaper than equity and helps them avoid large stake dilutions.

Investors say the rise of venture debt, especially amidst the equity slowdown, is a testament to the growing faith of investors in the new economy. “There are no global venture debt brands in India. This is a totally home-grown asset class that has been built with rupee capital,” says Rahul Khanna, Co-founder & Managing Partner of Trifecta Capital, a debt fund.

Over 100 venture debt deals were closed in India in 2022. With expanding capital allocation, the use cases for venture debt have evolved, too. Start-ups today are using debt to service their working capital needs, finance acquisitions, expand in new geographies, ramp up supply chains, and so on. “Amid rising interest rates and sustained high valuations, credit has emerged as an excellent opportunity for PE/VC investors to capture value,” says Dinkar Venkatasubramanian, Partner, Turnaround and Restructuring Strategy at EY.

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