M&A Momentum in India Set to Grow

In recent years, India has been garnering increasing attention as a prime destination for private capital investment and emerging as an attractive alternative for investors seeking growth opportunities. During the G20 summit this month, India was keen to demonstrate the country’s economic prowess and its desire to strengthen trade ties, attract new investments and take the lead on key global issues, such as energy transition. 

As such, we thought this would be an opportune moment to explore how the increasing interest from MNCs, Private Equity, Infrastructure Funds, and Financial Institutions, as well as the favourable structural growth drivers in India’s economy, coupled with a maturing, uniform and consolidating domestic market, is fueling a surge in the Indian M&A market.

India's appeal: The Goldilocks period begins

As I have written previously, market participants are embracing the new normal of the VUCA dynamic – an environment which is volatile, uncertain, complex and ambiguous. It is an environment where no one market or sector is dominating the playing field, but some segments and geographies are starting to look more favorable in relative terms.

As a result of China’s recent regulatory crackdowns and its slower economic recovery, investors are starting to view the opportunity set in India as higher alpha with lesser risk, while offering a relatively stable and exciting investment climate. The “marginal dollar” of investment is now flowing into India out of other regions of APAC.

For its part, the Indian government has made big strides to reduce bureaucratic red tape, which has improved ease of doing business in the country. India has also made massive commitments to improve its infrastructure and drive investment towards key sectors such renewables and energy transition, healthcare, business services, fintech and payments, manufacturing and agri-tech. These initiatives are helping transform India’s connectivity and improve the livelihood of its population, while in turn facilitating further commerce and boosting economic growth.

The government is also making a specific attempt to woo CEOs of global multinational technology companies, such as Microsoft and Alphabet, to attract capital and investment. Several global corporations, such as Apple, are shifting their manufacturing base to India as a function of renewed confidence in the country and their aims to diversify away from China.

In addition to favorable policies, the country benefits from an important structural growth driver – its demographics. India’s young and growing workforce gives it a significant demographic advantage over China and Japan, and is a crucial factor in attracting long-term investments. In 2021, India’s working-age population stood at more than 900 million and is expected to hit 1 billion over the next decade, according to the OECD. This ensures a strong labor force with higher spending power, while adding greater impetus on STEM education. These demographic dynamics will drive the economy for decades to come, and presents a large opportunity for consumption and investment across a variety of industries.  

It is no surprise then that India is poised for significant macroeconomic growth, with its GDP projected to overtake the US by 2050. On a comparative basis, the IMF predicts India’s GDP to grow 1.4%, 1.5% and 1.7% faster than China’s between 2024-2026. The recent news of India’s successful moon landing by the Chandrayaan-3 further highlights what can be achieved when ambition, technological innovation and government initiative drive the agenda.

Investors are taking note

While certain social and regulatory challenges persist, investors recognize the immense potential of the Indian market and are keen to capitalize on the opportunity it presents.

India’s private markets have expanded rapidly, with growing exit opportunities fueling more than $60 billion in PE and VC investment annually for three consecutive years, according to the 2023 Bain India PE report. And despite a contraction in private investment value in Asia Pacific overall in 2022 from the year prior, India’s share strengthened from less than 15% to about 20% of the total regional market, underlining the relative shift in investor allocation.

As evidence of viable exits increases with the deepening of capital markets and M&A activity, it further bolsters confidence in the Indian market, creating a positive feedback loop. Successful exits serve as a catalyst for greater investment as they provide evidence of returns. Despite earlier concerns over high valuations, gaining exposure to India's GDP-correlated sectors is crucial for strategic global investors and the growing evidence of successful exits will only serve to fuel further growth of the market.

The dawn of a new M&A cycle?

The confluence of favorable macro and regulatory factors and increasing investor interest sets the scene for M&A momentum in India to pick up significantly. With capital flow increasing, banks are playing an important role in facilitating various investment activities, including leveraged buy-outs (LBOs) for private equity and competitive financing for infrastructure funds and joint ventures (JVs). Banks are also stepping up to provide global financing solutions for investors involved in divestitures and acquisitions of assets in India.

A clear sign that the M&A market in India is already shifting can be seen in recent events, such as the merger of HDFC Bank with the Housing Development Finance Corporation, the country’s biggest mortgage lender, which created the world’s sixth largest bank (as of September 2023). Such developments spark curiosity about the future of the country’s mergers landscape, as investors wonder what other transformative deals may be on the horizon.

Businesses aligned with key sectors such as technology and renewables stand to benefit significantly from India's growth story. Innovative companies that can harness the convergence of technology with other classic sectors such as healthcare and consumer may be the biggest winners in the country’s ongoing push for digitalization. We will likely see much more M&A activity in these industries and asthe India market flourishes, more inbound investment is expected, creating a cyclical feedback loop for economic development and expansion.

How quickly or how soon will we see a sustained surge in M&A activity for India? In this VUCA world, making a concrete prediction is a risky endeavor. But there is no doubt that the structural growth drivers in India’s economy have set it on a path of economic acceleration, and investors and bankers will be keeping their eyes peeled to harness the opportunities ahead. What’s more, if the recent G20 is any indication, as India continues to assume the role of a respected and credible global intermediary in global relations, that will only support further investment and growth into its domestic economy.