Analysis by Mergermarket, an Acuris company owned by ION Group

With India's lockdowns being among the harshest in the world, the COVID-19 pandemic brought with it a plethora of challenges for most of the country’s traditional sectors, including retail, hospitality, and manufacturing. However, as they struggled to survive, a new set of companies have flourished, and have managed to grab the spotlight in India’s dealmaking and IPO market, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket in October this year.

These startups have been able to reach their customers remotely, using the latest in technology and innovation. As Zoom calls and working remotely become the new normal, investors are slowly shifting their focus to these new startups.

As a result, many of them have become IPO-ready, or have come under the radar of giant conglomerates looking to pay the hefty entrance fee to grab a piece of the pie. These glitzy startups are bringing “in new kinds of investors the country has not seen much of,” and are changing the age-old perception that India could never float tech.

IPO big bang

A host of factors including regulations have actively contributed to the surge in IPOs. According to Vivek Soni, National Leader, Private Equity Services, EY India, around US$10bn has been raised through 81 listings in 2021, with the healthcare and technology sectors attracting the most interest. Healthcare raised US$1bn with 10 listings, and technology raised US$1.7bn with eight listings.

Gaurav Jain, Principal, Kaizanvest, noted that regulatory change has allowed companies that are still not profitable to go public, opening up the market for a number of scaled-up companies, accelerating IPO timelines by three to five years. With this change, even PEs are willing to take bets on high-growth consumer tech businesses and still get an IPO exit.

Punit Gupta, Sr VP, Strategy and M&A Tata Consumer Products, highlighted another aspect, which is that due to scale, most of these startups are becoming very IPO ready. Many startups, including platform companies in the consumer space, are going for pre-IPO rounds.

According to George Belcher, Head of India, Datasite, documentation involved in IPOs has increased due to heavier due diligence driven by a rise in regulation, although the length and time needed to conduct it are decreasing due to technological intervention.

Segueing into SPACs

SPACs have emerged as one of the most discussed topics in 2021. According to Nidhi Kilawalla, Partner, Khaitan & Co, from target companies' perspective, this route is helpful as it significantly cuts down the time to IPO and eliminates the risk of a company being judged solely on its past performance, which traditionally has been the case with Indian listings.

That is also where technology and younger start-ups come in, as they typically see high valuations based on projections rather than on profit track record.

Kilawalla further mentioned that not every Indian target is well positioned to pursue the SPAC route, as there is also significant structuring required for SPAC listings of Indian targets.

Dealmaking frenzy

According to Soni, as far as global macro and geopolitical trends are concerned, the stars seemed to be aligned overall in India's favor. Due to the China's tech crackdown, allocations for India appear to be on the rise for large investors.

Emerging markets like India are also well positioned to provide general partners in the US and Europe with better yields.

Gupta said that M&A activity in the consumer sector is now being driven by a desire to scale up capability itself, rather than bridge portfolio gaps. In the last couple years, most market incumbents have either started investing in minority stakes or becoming partners with many of the digital or new firms that have emerged, thus building their own capabilities. They have also started investing fairly aggressively through their own venture arms into most of these companies.

On the other hand, the business model among startups has evolved, and they have also realized that a big part of their business model is dependent on consumers, Gupta added.

Therefore, in the last year, there has been an increase in the direct-to-consumer (DTC) channel. In the last two months, many of the firms including those operating in the beauty and personal care or automotive sectors, have witnessed the acquisition of more DTC brands. This gives them direct consumer access and a strong margin profile, along with specific insights and customized recommendations.

Belcher highlighted the  survey that Datasite ran of 200 dealmakers in India and SEA. According to the survey, 90% of the respondents said technology and M&A sophistication is currently at low or medium levels. Further, 45% of them said that by 2025 they expect it to be at a higher level of sophistication.

Jain said that many IPO-ready companies are looking to do bolt-ons. Apart from that, there is still a lot of consolidation left to be done in the edtech space. For example, apart from K-12, most other spaces are very fragmented. Thus, once clear market leaders emerge, then M&A activity is going to increase.

Tech enhancements not only enabled, but improved deal making during lockdowns

COVID-19 lockdowns could have been a huge blow to the deal making process as people were locked away in their homes. But work continued “at a frenzied pace,” all speakers agreed, with technology acting as an enabler that will only improve the process of deal making in the future.

Belcher said that during the last couple of years there was a big shift in how things were being done in terms of M&A. According to Datasite estimates, since the beginning of the COVID-19 pandemic, 90% of all transactions have taken place with no face-to-face interaction whatsoever.

There have also been some exciting developments, he said, like the use of drones for M&A site tours and industries like oil and gas where a drone can be sent rather than sending someone for a site visit. Considering all the travel time and expenses one gets to save with all the tech, he said he feels that a lot of these trends will continue after the pandemic as well.

Meanwhile, Killawala said, “Technology is a huge enabler. It helps to get your deals done more quickly and often at a lower cost.” New technologies, she added, are enabling analysis to go beyond just review, and now helps to plan next steps.

Belcher said these technological enhancements have further potential to grow, especially in areas relating to artificial intelligence and big data, which are going to be the key drivers, among others.

Citing Datasite’s data, Belcher said that three years ago the average due diligence for M&A or IPO deals would take about nine to 12 months. But now, after nearly a couple years of COVID-19, it has been reduced to six to seven months.

Belcher concluded his comments, saying that technology is not going to replace anyone, but it is going to enable deal makers to better manage their time.

ESG – Not just an import from the West

Gupta said that ESG in India is at a slightly nascent stage, although it is moving from, “good to have to must have.” This evolution, he said, is in the right direction.

For instance, he said the ESG index has shown better returns than the Nifty 50 index. As per a Mint report from 24 August, the Nifty 100 ESG index has outperformed Nifty 50, posting 51% returns against the latter’s 47% in the last 12 months

Gupta added that the foreign institutional investors have brought about a change in the Indian market, as ESG is a very strong element now in the Western world that is flowing through.

“I would, however, look at the governance part being a bigger factor in India, or it would take prime importance,” he said.

Meanwhile, when talking about how important and pervasive ESG has become, Belcher cited a recent Datasite survey of 400 dealmakers globally on their opinions about  emerging risks and completing M&A transactions. The survey found that about 46% of them said ESG and specifically climate change would be the biggest risks to deal making in the coming years. This came ahead of COVID-19, inflation, regulations, and geopolitical concerns.

“From our perspective, more ESG focus would mean more complex due diligence,” he said, adding that this could result in deal times slowing down a bit. He reassured, however, that as the M&A landscape evolves with ESG, the due diligence process will also evolve.

This webinar coverage article was originally published by Mergermarket on November 22, 2021; it has been republished with permission.