Domestic private capital plays a key role in financing Indian businesses
We have many domestic players that focus on channelling foreign private capital into local ventures, especially in emerging fields. They must optimize their portfolio diversification to offer global investors the India exposure they’re looking for.
Private capital deployment in India has risen steadily from $37 billion in 2012–2014 to $137 billion in 2022–2024, and its role in financing private enterprises has expanded over this time. The share of domestic private equity (PE) in overall PE activity in India has also grown from 9% to 11% during this period, as McKinsey data shows.
What’s fuelling domestic funds?: Three drivers are underpinning the development and growth of domestic funds in India: more domestic general partners (GPs or fund managers); greater fund-raising and fund sizes; and emerging interest among limited partners (LPs or investors) in India-specific portfolios.
Also Read: A private capex slump: An imperfect but indicative survey points to one
The number of domestic GPs with $50 million or more deployed has more than doubled from 34 to 80 between 2016–2018 and 2022–2024. Their average deal size has also risen from $98 million to $114 million, and they are addressing a more diversified set of needs among mid-market enterprises. Despite this growth, the share of domestic GPs in total PE deployment in India is a relatively modest 11% compared to 62% in Korea and 26% in Japan, leaving headroom for growth.
Fund-raising by Indian domestic GPs has been picking up, going from $8.2 billion in 2016–2018 to $13.7 billion in 2022–2024. Over half (or 59%) of all capital, however, was concentrated in the top six funds in 2016–2018. By 2022–2024, the concentration rose to 64%, indicating a marked preference for managers with strong track records and successful and stable teams.
Uniquely, over 90% of this capital comes from foreign investors, as domestic fund-raising remains constrained by regulation. Further, unlike other markets where domestic investors are a material source of funding for domestic GPs, India’s domestic GPs compete with global GPs for the capital of foreign LPs.
Also Read: Reform agenda: What India must do to get private sector investment going
Domestic GPs offer attractive, India-specific growth exposure to globally diversified LP portfolios, especially as India is projected to contribute over 17% of global GDP (excluding China and the US) growth as its GDP grows from $3.5 trillion currently to $20 trillion in 2045.
Value proposition of domestic GPs: They offer diversified exposure compared to global and regional peers. Top domestic funds deploy about 80% of their capital across four to six sectors, whereas global and regional managers typically concentrate 80% of deployment across two or three sectors. As the economy expands, such diversification could be a virtue for two reasons: emerging investment opportunities in traditional high-growth sectors (such as logistics, wellness services, energy transition, supplemental education and asset management) and sunrise sectors supported by a push for import substitution (such as electronics, medical devices) and the government’s production-linked incentive scheme.
Growth is a priority as about 75% of capital goes into expansion: Capital in India is needed to fund private enterprise research and development, product development, growth in sales and distribution and new market entries, apart from working capital, unlike more mature markets where funding goes into consolidation and ownership changes. India’s degree of inorganic consolidation, with an M&A (mergers and acquisitions)-to-GDP ratio of 2-4%, is far lower than the US’s 8-10%. Domestic GPs remain well positioned to fund early- to mid-stage expansion in fast-growing sectors, where ticket sizes or risk profiles often do not suit bigger regional and global funds that focus on big-ticket buyouts with stakes acquired in relatively well-capitalized businesses from existing owners.
Also Read: Seven reform pathways to bridge India’s urban investment gaps
Address a broader spectrum of capital needs: Ready to invest anywhere between $25 million and $200 million, domestic managers can address a broader spectrum of opportunities aligned with the evolving needs of Indian businesses. Domestic GPs also view emerging public markets, private credit and real assets as important. This promotes investments in new India-specific capabilities without the burden of legacy approaches.
What attracts global and domestic LPs?: Global LPs seeking to increase their allocation to India say they look to domestic GPs for access to more diversified India-specific portfolios. They prioritize internal rate of return and distributed-to-paid-in capital performance measures while treating strong governance and co-investment rights as table stakes.
On the other hand, domestic LPs, including family offices and high net worth individuals, view domestic GPs as a way to get exposure to private alternatives, diversify investments beyond their core business and exercise co-investment rights in well-governed businesses that they find attractive. They tend to focus on absolute returns and have a high bar, given India’s public market return record.
Domestic GPs have played a meaningful role in private capital deployment in other Asian markets. They are also an increasing source of foreign direct investment and can play a key role in financing the needs of mid-market businesses as well as sunrise sectors in India. Last but not the least, they provide India-specific exposure to global private capital participants.
Anmol Chaudhary and Mridul Chandgothia of McKinsey & Co. contributed to this article.
The authors are, respectively, a senior partner & a partner in McKinsey’s Mumbai office.
topics
