Tech-focused VC firm Iron Pillar sees an upside in India’s market correction

Even as macroeconomic headwinds are threatening to derail the deal-making momentum in the short-to-medium term in India, limited partners (LPs), who invest in private equity (PE) and venture capital (VC) funds, are not necessarily worried.

“Many deals are getting delayed now… there’s quite a bit of renegotiation happening in deal-making but that’s not necessarily a bad thing,” Anand Prasanna, managing partner at mid-stage, technology-focused VC firm Iron Pillar, told DealStreetAsia in an interview.

“Too much capital was being deployed too soon. Right now, there is a pause and that reflects a correction in the market.”

Amid current market uncertainty due to geopolitical tensions resulting from the Ukraine-Russia war, macroeconomic policies-led inflation and consequent corrective actions in the form of increasing interest rates, LPs may take longer to deploy the capital they have committed to India.

According to data available with research firm Venture Intelligence, LPs committed a whopping $3.4 billion to India-focused PE and VC firms during January-April this year on the back of better-than-expected Indian economic revival, successful vaccination drives and alignment of global macro factors at that point in time.

“Sentiments have changed this year. The pace of investments has come down so capital deployment by LPs will also be slower. But this is being viewed as a positive thing,” said Prasanna.

PE and VC should ideally deploy capital over 3-4 years but “in a lot of cases, they were hurrying. That resulted in inflated valuations. Now, there is more discipline in terms of investments, and valuations of companies have corrected by almost 50% in some cases,” said Prasanna.

A galloping ground for unicorns

Iron Pillar recently came up with a report that said India would have more than 250 unicorns by 2025.

“This is very much an achievable target as opportunities are huge in India. Our thought process is not driven just by the availability of liquidity. That’s just one part. The other thing is how well the Indian economy is doing. While most people will look at these two factors, there’s much more to it.”

As much as 55% of the 130 Indian unicorns in Iron Pillar’s April report caters to the domestic market. The other 45% — that is 58 of the 130 unicorns — is building for countries beyond India.

“Here, we are talking about almost half of the Indian tech ecosystem building up for the global market. That’s where the opportunity lies given the sheer scope and opportunity in the larger ecosystem. With uncertainty prevailing in the global market, the tailwinds have increased for these firms,” said Prasanna.

However, there could be a deceleration in the number of unicorns created over the next 12-18 months.

“We factored in this downturn from November last year. And that is what people are seeing today. And it’s not like India is the only country going through this,” said Prasanna.

Earlier this month, Fitch Ratings revised India’s outlook from ‘negative’ to ‘stable’, citing reasons such as fading downside risks to medium-term growth with the easing of weaknesses in the financial sector.

The global rating firm, however, has lowered its GDP growth forecast for 2022-23 to 7.8% from 8.5% projected in March.

“India is still the fastest-growing economy in the world… a projected growth is not catastrophic. It would still mean India is head and shoulders with other large economies.”

Exit challenges

During the first five months this year, PE and VC firms raked in $6 billion from 90 exit deals, recording a 62.5% decline from the same period last year, per Venture Intelligence.

During the same period in 2021, PE-VC firms had encashed $16 billion from 99 exit deals.

“While there is a lot of demand for tech companies, exits have to happen at the right and sensible valuations. At this time, investors really need to think through what the valuations should be,” said Prasanna.

Iron Pillar, established in January 2016, provides growth capital across Series B, C and D rounds to help startups carve their global expansion plans.

Its portfolio includes automation startup unicorn Uniphore; FreshtoHome, an e-commerce firm focused on delivering fresh fish and meat; device lifecycle management platform Servify; and cloud kitchen startup Curefoods, among others.