Growth of Venture Capital and Private Equity in India

Poonam Dugar and Nirali Pandit

JPE 2017, 21 (1) 79-93

doi: https://doi.org/10.3905/jpe.2017.21.1.079
http://jpe.iijournals.com/content/21/1/79
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 Growth of Venture Capital
and Private Equity in India
Poonam Dugar and Nirali Pandit
V
Poonam Dugar enture capital and private equity
is a senior lecturer in (VCPE) have been evolving
the Finance Accounting
as a separate asset class and a
& Control Area of the
Amrut Mody School potential source of corporate
of Management at finance; in developing economies like India,
Ahmedabad University in VCPE supplements the traditional sources of
Ahmedabad, India. resource mobilization, such as public equity
poonam.dugar@ahduni.edu.in issues, private placements, and external
Nirali Pandit
commercial borrowings ( Jain and Manna
is an associate faculty [2009]). The role of VCPE investments in
member with the fueling business creation, innovation, and
Entrepreneurship growth in India cannot be undermined.
Development Institute With the beginning of the 21st century,
of India in Ahmedabad,
domestic and international business activi-
India.
nirali@ediindia.org ties have experienced tremendous advance-
ment and redefining under the shadow of
various macro- and microeconomic events
in the country, thereby increasing the f low
of investment (Deloitte [2012]). The unique-
ness of VCPE investments in supporting
risky ventures has differentiated it from
other conventional sources of funding, and
the gradual creation of a favorable environ-
ment in the country has attracted more and
more VCPE investors, thereby contributing
to India’s growth (Deloitte [2014]). These
VCPE investors typically look for the safety
of capital invested in regions and asset classes
that generate value and have the potential to
provide scalable returns.
Statistics show that India’s economy
was the fastest in terms of the industry
growth rate, and it ranked third in terms
Winter 2017
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of the quantity of investment during the
period 2004–2008 (PricewaterhouseCoopers
[2008]). As per the International Monetary
Fund’s “World Economic Outlook Update,”
India had a growth rate of 7.6% and 6.6% in
2015 and 2016, respectively, with estimates
of 7.2% for 2017, making it one of the fastest-
growing developing economies in the world
(KPMG [2016]). With reference to the value
of VCPE investments, Venture Economics data
indicate that during the period 1990–1999,
India ranked 25th out of 64 countries; this
improved in the next decade, 2000–2009,
when its ranking rose to 13th out of 90
countries. During 2005–2009, the trend
was even more encouraging when India’s
ranking was 10th out of 77 countries (Rajan
and Deshmukh [2011]).
This study makes an attempt to ana-
lyze the trends of VCPE investments in India
during the past two decades, from 1998 to
2016, which would ref lect the adaption,
adoption, and acceptability of this innova-
tive asset class in the Indian business world,
according to the economic climate and con-
sumption patterns in the country.
OBJECTIVE OF THE STUDY
The growth of the VCPE industry in
India is clearly evident from the preceding
discussion, but little academic research has
been done to capture the trends in VCPE
The Journal of P rivate Equity    79
investments in their entirety. Previous research on trends
in VCPE investments was limited in terms of either the
type of investments (covering either VC or PE only) or in
terms of the period of study (being either a decade before
the growth phase [before 2004] or covering a smaller
period just after the global financial crisis [2004–2009]).
This study is an attempt to close the gap in research to
study the trends in VCPE investments covering the two
decades from 1998 to 2016, which would reflect all phases,
including pre-growth, growth, the slow down during
crisis, the rise after the crisis, and recent growth stages.
The objectives of this study are as follows:
1. To analyze the trends in the Indian VCPE industry
over the defined period
2. To study the penetration of VCPE investments
across various industries in India
3. To study the impact of the number of deals on
the value of VCPE investments in total and
industrywise.
LITERATURE REVIEW
Gompers [1994] explored the importance of VC
financing as a major contributor in the economic growth
of the United States and found that increases in the f low
of VC investments can be attributed to various regula-
tory changes. The determinants affecting the demand of
VC investments include higher gross domestic product
(GDP) growth, increased research and development
spending, lower capital gains tax rates, and a favorable reg-
ulatory environment, along with the enabling economic
and political environment in the country (Gompers and
Lerner [1998]; Naqi and Hettihewa [2007]; Kumari
[2013]; Tripathi [2015]; Reddy [2015]). Globalization
led to geographic distribution of the VC sources of
various countries, with preference of investment given
to technology industries and a disproportionate repre-
sentation of industries that have high levels of infor-
mation asymmetry (Amit, Brander, and Zott [1998];
Subhash [2006]). VC investments showed concentration
in financial clusters and, with the growth in regional
development, saw a spatial shift ref lecting technolog-
ical and industrial clustering (Florida and Smith [1993];
Bowonder and Mani [2002]).
In India, VC f irms are giving more promi-
nence to knowledge-intensive service sectors like
banking, financial services, and insurance; information
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technology (IT) and information technology enabled
services (ITES); media and entertainment; healthcare;
and life sciences, which ref lects uniform distribution of
VCPE investments across different industries as com-
pared to the initial skewed distribution in technology
industries. The promotion of these sectors will create a
boom for the Indian economy (Kumari [2013]; Srinivas
[2013]; Komala and Muninarayanappa [2015]; Reddy
[2015]). The growth of VC investments has a strong
correlation with the number of deals and the value of
investments occurring in a country (Komala [2014]).
DATA SOURCES AND METHODOLOGY
The period from 1998 to 2016 coincides with a
period of high growth and the deepening and broad-
ening of the VCPE industry in India. A secondary
dataset of VCPE investment deals made, obtained from
the database of Venture Intelligence, India (http://www
.ventureintelligence.com/) was used for research purposes.
The analysis is based on 6,462 deals executed from
April 1998 to March 2016 in 3,841 companies. Out of
these, investment data for 5,781 deals were available,
totaling $117,854 million. The dataset used for this anal-
ysis does not include VCPE investment in infrastructure
and real estate. This dataset might not include all of the
VCPE deals during the period because many of the deals
may not have been announced, but we believe the data
capture the majority of the investment that happened
during the period and, more importantly, are represen-
tative of the industry trends.
The total VCPE investments have been analyzed
through year-over-year (YOY) growth and compound
annual growth rate (CAGR) for the entire period. Simi-
larly, the analysis of VCPE investments across industries
has been done by using percentage analysis across dif-
ferent subperiods and by calculating the CAGR for each
industry. Empirical analysis is also done through a linear
regression model to check the impact of the number of
deals on the value of VCPE investments both in total
and industrywise.
Analysis of Trends of Total VCPE
Investments by Value and Number of Deals
Exhibit 1 shows the total value of VCPE investments,
the number of deals, YOY growth rate, and the CAGR
of VCPE investments for the 19-year period (1998–2016).
Exhibit 1 The CAGR and YOY growth are calculated as
Yearwise Distribution of VCPE Investments in follows:
Value and Number of Deals
CAGR = (Ending value/Beginning value) – 1 (1)
(1/n )

 Current year’s – Previous year’s 

 investments  (2)
YOY growth = investments
Previous year’s investments
From Exhibit 2, we can observe that VCPE invest-
ments have shown a linear growth trend over the two-
decade period, and the number of deals also mirrors the
growth trend of the value of investments. There have
been some highs and lows in this large time span, which
is evident in Exhibit 2. The trends in VCPE investments
can be observed in more depth by segregating it into
smaller time periods. Hence, total VCPE investment
and its penetration in various industries of the economy
are divided into relevant time periods and studied in the
following sections. This will enable us to understand the
various factors that have affected the growth trends at
different points in time.

Analysis of YOY Growth Rate for Value

of VCPE Investments—Periodwise

YOY growth rate from 1998–2005. The growth

trajectory of VCPE investments as ref lected over the
years has seen a phenomenal increase both in terms of
amount invested and number of deals. The 444% increase
Source: Compiled from Venture Intelligence, India Database.

Exhibit 2
VCPE Investments in Value and Number of Deals

Source: Compiled from Exhibit 1.

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Exhibit 3
YOY Growth Rate for VCPE Investments (value) from 1998–2005
Source: Compiled from Exhibit 1.
Exhibit 4
YOY Growth Rate for VCPE Investments (value) from 2006–2009
Source: Compiled from Exhibit 1.
in VCPE investments from 1998 to 2001 ($152 million
to $828 million) as seen in Exhibit 2 can be attributed
to the formalization of VC guidelines by the Securities
and Exchange Board of India for both Indian and foreign
investors and to the overall IT boom, which allowed
global business interactions to become much easier.
During 2001–2003, investments decreased, as can be
observed from the 33% fall in the YOY growth rate
from 2001 to 2002 and the 6% fall from 2002 to 2003.
This fall in the investments was seen as being a result
of the burst of the Dotcom Bubble in the United States
and its impact on other developing economies like India.
After 2004, when global economic expansion
kicked in, VCPE firms shifted their focus to emerging
economies like India and China. The Indian economy
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started recovering through its favorable macroeconomic
indicators, fast-growing companies open to the world,
and fast-growing middle class, thereby increasing con-
sumption (Bain & Company [2011]). These macrofun-
damentals thus suited the needs of VCPE investors, as
can be seen from the 243% increase in the YOY growth
rate of investments from 2003 to 2004 and a further
increase of 33% from 2004–2005 (Exhibit 3).
YOY growth rate from 2006–2009. As seen
in Exhibit 4, in 2006 and 2007, there was a substantial
growth of 194% and 98%, respectively, in the value of
investments, which reached its peak of $13,791 million
in 2007. In absolute terms, over the decade ending 2007,
the growth is ref lected in the increase in investments and
the number of deals from $152 million to $13,791 million
Exhibit 5
YOY Growth Rate for VCPE Investments (value) from 2010–2016
Source: Compiled from Exhibit 1.
and 15 to 473, respectively (refer to Exhibit 1). This was
the time when capital f lowed to some 1,000 companies
from across every major sector of India’s economy,
including service companies ranging from healthcare to
telecom, manufacturing enterprises, technology firms,
energy producers, and real estate ventures. The sheer
number and variety of deals moved India from sixth
place among the largest VCPE markets in the Asia-
Pacific region (including Australia) in 2004 to the top
spot by 2007 (Bain & Company [2011]).
The first leg of India’s VCPE journey came to an
end in the next two-year period of 2008–2009, which
saw a drastic decline in the value of investments, as
observed from the drop in the YOY growth rate by 33%
in 2008 and a further 60% in 2009. The VCPE market in
India was adversely affected by the U.S. subprime mort-
gage crisis. The investment euphoria died down after
the global financial crisis in 2008, making the inves-
tors more careful and more likely to carry out deeper
diligence before investing. The major reason for this
drop was the falling public market valuations; the strong
companies were not interested in selling their stakes to
the VCPE investors because of the depressed prices (Bain
& Company [2011]). This problem grew more dire in
the first half of 2009, with a drop in GDP to around 6%
from the earlier 8–9%. However, the situation reversed
in the second half of 2009 when the emerging markets
started to recover as compared to developed economies,
and India’s GDP started climbing again.
YOY growth rate from 2010 to 2016. After
the credit meltdown and subsequent recession in the
world’s largest economies after 2009, India saw some
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revival when the credit market conditions improved.
Consequently, India’s GDP growth was pegged at
8.7% in 2010 due to increased consumer and public
infrastructure spending (Bain & Company [2011]). This
increased the confidence of the VCPE investors for long-
term investments in India. As seen in Exhibit 5, this
confidence was ref lected in the increasing YOY growth
rate of 113% in 2010 and 25% in 2011. The growth
chart saw some corrections in 2012, 2013, and 2016
to the extent of 8%, 19%, and 11%, respectively. The
decline in 2012 was seen as a result of a series of events,
including the logjam in India’s political landscape, high
inf lation, low Index of Industrial Production growth,
a depreciating rupee, and regulatory issues regarding
retrospective tax issues to foreign investors (Bain &
Company [2013]).
The effects of these factors continued in 2013 as
India witnessed a tough macroeconomic environment
with muted YOY GDP growth of approximately 5%,
inf lationary pressures, about 11% currency depreciation,
and unstable interest rates. (Bain & Company [2014]).
The VCPE market climbed to another peak in
2014 with a YOY growth rate of 43%, recovering from
the decline of 19% in 2013. At this time, the Indian
VCPE environment received a boost from the coun-
try’s macroeconomic environment becoming favorable
with the new government at the helm. The GDP rose
to 6.6% in 2014, and foreign direct investment (FDI)
inf low reached $29 billion, the highest amount in five
years, with VCPE’s contribution amounting to 53%
of the inf low. The new government started working
toward improving the business environment in the
The Journal of P rivate Equity    83
country, making it an attractive destination for future
investments. (Bain & Company [2015]).
In 2015, annual investments reached $16,445 mil-
lion, their highest peak after 2007, with a similar increase
in the number of deals, which were at an all-time high
of 714. Factors contributing to this increase include
the improving macroeconomic conditions, positive
changes in the exit environment, and several govern-
ment initiatives—such as the Start-up India program,
tax regime rationalization, and Make in India—that
encouraged investments. The technology start-up and
e-commerce funding booms were also responsible for the
increased investments in 2015 (Bain & Company [2016]).
The year 2016 saw a minor correction of 11%
in terms of the investment value, but it still stands
as the second highest after 2015 in terms of the total
investments made annually over the past two decades.
The major factors affecting this decline could be
Exhibit 6
CAGR of VCPE Investments in Value and Number
of Deals
Source: Compiled from Exhibit 1.
Exhibit 7
CAGR of VCPE Investments in Value and Number of Deals (periodwise and aggregate)
Source: Compiled from Exhibit 6.
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regulatory and economic changes, such as the passing
of GST Act and demonetization in the country. This
reduction was also expected because of the decline in
e-commerce– and technology-sector VCPE invest-
ments and political and economic turmoil in Europe,
including Brexit, affecting the foreign investors who
are major contributors to VCPE investments in India.
(KPMG [2016]).
Analysis of CAGR for Value of VCPE
Investments and Number of VCPE Deals
In Exhibits 6 and 7, if we look at the eight-year
period of 1998–2005, investments grew at a CAGR
of 48%, which can be called substantial growth in
VCPE investments. Similarly, the number of deals for
the period represents a CAGR of 44%, which shows
a similar trend of steady growth. During the next
four-year period, 2006–2009, investments saw a nega-
tive CAGR of -19%, although the VCPE investments
were at their peak during 2007, both in terms of value
and deals. Similarly, the number of deals for the period
2006–2009 represents a negative CAGR of -9%, which
shows a trend similar to the investment values. This
drop can be attributed to the serious consequences of
the global financial crisis. Finally, the CAGR for the
value of VCPE investments from 2010–2016, after the
recovery from the crisis, is 10%, which is quite stable,
and the CAGR for the number of deals made is 9%.
This represents a strong recovery over the downfall in
the previous periods.
 Thus, with all the ups and downs over the two
decades, the overall CAGR from 1998–2016 is 29%
for the value of investments and 22% for the number
of deals, which qualifies as steady growth of VCPE
investments in India.
Exhibit 8
Industrywise VCPE Investments by Value and
Number of Deals
Source: Compiled from Venture Intelligence, India Database.
Exhibit 9
Industrywise VCPE Investments in Value (millions of USD) from 1998–2016
Source: Compiled from Exhibit 8.
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Analysis of VCPE Investments by Industry
Exhibit 8 shows the overall distribution of VCPE
investments in value and number of deals over various
industries for the period from 1998 to 2016.
Analysis of Aggregate Industrywise VCPE
Investments in Value and Number of Deals
Exhibit 9 shows the proportion of total VCPE
investments that went into each of the industries, and
Exhibit 10 shows the proportion of the number of deals
across the various industries. Looking at the aggre-
gate picture from 1998–2016, in terms of the value
of investments, it can be observed that the majority
of the investments were attracted by IT and ITES
(28%, $33,492 million) followed by engineering (16%,
$19,162 million), BFSI (14%, $16,091 million), and
manufacturing (13%, $14,823 million), which means
almost 70% of the total VCPE investments are concen-
trated in these four industries, with the IT and ITES
sector being the major driver, as has also been the trend
globally.
An interesting scenario can be noticed when we
compare investments in value with the number of deals.
Although the IT and ITES industry occupies the largest
percentage of the pie in terms of both value and volume,
The Journal of P rivate Equity    85
Exhibit 10
Industrywise VCPE Investments in Number of Deals from 1998–2016
Source: Compiled from Exhibit 8.
it can be observed that almost 40% of the number of
deals attracts 28% of the value of investments, which
means that the average investment per deal is lower com-
pared to other major sectors. On the other hand, if we
observe the BFSI, engineering, and telecom industries,
which are contributing 14%, 16%, and 9%, respectively,
to total investments in value, the volume of their deals
occupies a lesser proportion of the total volume, being
10% (563), 10% (582), and 4% (254), respectively, com-
pared to their proportions in terms of value. The reason
behind this is that they are all capital-intensive industries
and therefore have a higher average investment per deal
compared to the other sectors.
Thus, it becomes interesting to compare indus-
tries on the basis of their average investment per deal,
as calculated in Exhibit 8, which shows that the telecom
industry is at the top with $43.02 million, followed by
engineering ($32.92 million), BFSI ($028.58 million),
and shipping ($25.44 million). All the other sectors
are in the range of $14–20 million per deal, with IT
and ITES being the lowest at $14.83 million. Thus, it
can be observed that capital-intensive industries have a
lower number of deals with higher volume compared
to less capital-intensive industries. Similarly, another
probable reason is that, if the majority of the deals in
an industry are in the early stage of the company, the
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volume of investments would be lower as compared to
investments in the late stage of the company, when the
capital requirements would be higher.
Seasonal Variations in the Industrywise
VCPE Investments
Exhibit 11 shows the value of VCPE investments
in India across nine industry segments in terms of per-
centage of total investments over the 19-year period from
1998–2016. The analysis is done by breaking the total
period in three parts, 1998–2004, 2005–2010, and 2011–
2016, which ref lect interesting shifts in the concentra-
tion of VCPE investments across various industries.
From 1998–2004. It can be observed in Exhibit 12
that IT and ITES, BFSI, manufacturing, and telecom
were the most favored industries for the VCPE firms
for the period 1998–2002, contributing almost 70%
to the total investments, with marginal investments
from the other industries. This period also coincided
with the overall IT boom, making technology-based
industries an attractive destination for global investors.
Within the same period, f luctuations were observed
among the top attractive industries as well, especially
in the BFSI industry, where the percentage dropped
from 67% to 2% from 1998 to 2002. Post 2002,
Exhibit 11
Yearwise–Industrywise VCPE Investments (value in millions of USD) with Percentage of Total Annual
Investments Industrywise

Source: Compiled from Venture Intelligence, India Database.

Exhibit 12
Yearwise–Industrywise Percentage of Total Annual VCPE Investments from 1998–2004

Source: Compiled from Exhibit 11.

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Exhibit 13
Yearwise–Industrywise Percentage of Total Annual VCPE Investments from 2005–2010

Source: Compiled from Exhibit 11.

Exhibit 14
Yearwise–Industrywise Percentage of Total Annual VCPE Investments from 2011–2016

Source: Compiled from Exhibit 11.

the concentration of the VCPE investments started
shifting to other industry areas, where engineering and
healthcare emerged to be the new industries that started
attracting VCPE funding. This resulted in the share of
the top industries being reduced to 50% –60% from the
earlier 70%. This decrease can be partially attributed to
the impact of the Dotcom Bubble and favorable policies
to encourage investments in consumer-based industries
like manufacturing, healthcare, and engineering.
From 2005–2010. Exhibit 13 ref lects the
redistribution of funding across other industry categories
beginning in 2005, when the IT and ITES sector’s share
started falling from 50% to 20%, and industries like
engineering, telecom, and healthcare started to emerge as
attractive sectors. For the period from 2005 to 2011, we
can observe that the share of IT and ITES was drastically
reduced to 18%–20% compared to the earlier 50%–70%,
and BFSI’s share increased again to reach to around 15%
from its earlier drop to 2%. Manufacturing, telecom,
and healthcare were more or less stable at around 20%,
15%, and 5%, respectively, during 2005–2010. During
the same period, the industry that emerged strikingly
was the engineering industry, whose share increased
from 8% to around 34%.
From 2011–2016. As seen in Exhibit 14, during
the period 2011–2016, the IT and ITES industry picked
up momentum once again, increasing its share close to
46%, whereas the other industries almost retained their

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Exhibit 15
Industrywise CAGR of VCPE Investments (value in millions of USD) from 1998–2016
Source: Compiled from Exhibit 11.
shares, except the manufacturing industry (whose share
reduced from 20% to 9%) and the engineering industry
(reduced from 34% to 13%). The rise in the IT and
ITES industry can be attributed to the boom in the
e-commerce sector after 2012. During this time period,
the healthcare industry also increased from its previous
5% to around 15% in 2013.
In a nutshell, the IT and ITES, BFSI, manufac-
turing, and engineering industries were the most favored
industries throughout the 19-year period from 1998–
2016, with some seasonal momentum in the healthcare
and telecom industries during 2013–2014 and 2007–
2008, respectively.
Industry Growth through VCPE Investments
Measured by CAGR
Exhibit 15 ref lects the CAGR of individual indus-
tries from 1998–2016. As discussed previously, IT and
ITES, engineering, BFSI, and manufacturing industries,
given in the order of their shares, attracted the most
VCPE funding. However, the data reveal some inter-
esting facts when we compare the CAGR of industries
standing alone. It can be observed that the engineering
industry, which started attracting funding only after
2004, shows a CAGR of 59%, ref lecting stable growth
over the period, whereas the IT and ITES industry, with
a 32% CAGR, saw many f luctuations with its share of
contributions in attracting VCPE funding. BFSI (19%),
healthcare (22%), and shipping (27%) were more or less
stable throughout the years with a steady CAGR and
some attractive years in the last two decades. The manu-
facturing industry, with a CAGR of (29%), again saw
many f luctuations: It started with a percentage share of
8% toward total investments in 1998 and moved toward
a range 21% –34% up to 2011, before coming down to
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9% again in the past few years. The telecom and media
industry, with a CAGR of 20%, had a larger, two-digit
share up to 2011, which has reduced to single digits in
the past few years.
On the basis of this analysis, the following observa-
tions can be made:
1. VCPE investments in India have clearly shown
concentration in technology-based industries like
IT and ITES, BFS, and telecom and in consumer-
based industries like manufacturing and engi-
neering, with emerging trends ref lected in the
healthcare industry also. The literature shows evi-
dence of global VC industries also showing similar
trends, which means that these industries have the
potential to grow along with the economic growth
in the country and provide scalable returns to the
VCPE investors, which makes them attractive tar-
gets for receiving VCPE investments.
2. The IT and ITES sector, showing rapid growth
over the years, kept attracting global investors’
confidence in India’s IT capabilities. BFSI also
showed its potential to expand in rural areas,
thereby attracting more funding, and the health-
care industry, driven by demographics featuring
an aging population and growing lifestyle-
related diseases, is another ideal platform for
investment.
3. Thus, growth of VCPE investments and industry
clustering has a strong correlation with each other.
It can also be concluded that effective and proac-
tive government policies, like allowance of FDI
in various sectors of the economy, would facilitate
more VCPE investments in those sectors, thereby
leading to the overall economic growth of the
country.
The Journal of P rivate Equity    89
Exhibit 16
VCPE Investments Trends across the Number of VCPE Deals from 1998–2016
Source: Compiled from Exhibit 1.
Empirical Analysis of Total VCPE
Investments
The analysis of both total VCPE investments and
the number of deals over the two-decade period 1998–
2016 shows linear growth, as shown in the Exhibit 16.
In the earlier section, we analyzed the VCPE
investments through YOY growth rate and CAGR by
dividing the entire period into shorter periods to more
closely examine the growth trends. We identified sig-
nificant factors that affected the ups and downs at var-
ious points in time. Furthermore, an empirical analysis
using the regression method will help in better studying
the impact on the variations observed. For this, VCPE
investments (in USD millions) made by VC firms was
taken as the dependent variable, which will be regressed
on the number of deals of the VCPE investment. The
hypothesis has been framed accordingly:
H0 : The number of deals does not have a signifi-
cant impact on the amount of investments made
by VC firms.
From the regression equation model shown in
Exhibit 17, we can see that the R 2 value is quite high,
which means the model explains that 93% of the varia-
tions in the value of VCPE investments is affected only
by the number of deals made. The coefficient of the
independent variable (number of deals) is positive,
which means that one additional deal made by VCPE
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Exhibit 17
Dependent Variable (VCPE investments) Is Linearly
Regressed on Number of Deals
firms brings about $24 million of fresh VCPE invest-
ments. Furthermore, because the p-value is less than
0.01, the coefficient is statistically highly significant,
and so we reject the null hypothesis. Thus, we conclude
that number of deals is a significant determinant of the
amount of VCPE investments in India.
Empirical Analysis of Total VCPE
Investments by Industry
In the earlier section, we analyzed the growth
trends of the aggregate VCPE investments during 1998–
2016 in different industries of the economy by dividing
them into shorter time periods. We observed signifi-
cant variations as well as concentration of investments
in various industries over the defined period. We now
empirically analyze the impact of the number of deals
made in different industries on the variations in the
VCPE investments in the respective industries for the
entire time frame to check for any significant impact.
Exhibit 18
Dependent Variable (VCPE investments)
Industrywise Is Linearly Regressed on Number
of Deals Industrywise
For this, VCPE investments (in millions of USD mil-
lions) made by VC firms in various industries was taken
as the dependent variable, which will be regressed on
the number of deals in the respective industries. The
hypothesis has been framed accordingly:
H0 : The number of deals in the various industries
does not have a significant impact on the amount
of VCPE investments made by VC firms in those
respective industries
Exhibit 18 shows the linear regression models for
VCPE investments in different industries for the entire
defined period during 1998–2016. We can observe some
interesting results for different industries:
1. In the IT and ITES industry, the high R 2 explains
that 93% of the variations in the value of VCPE
investments are affected only by the number of
deals in the industry. The coefficient of the inde-
pendent variable (number of deals) is also positive,
which means that one additional deal brings about
$18 million of fresh VCPE investments. This shows
that IT and ITES, which has been the most attrac-
tive sector in terms of investments, with signifi-
cant variations over time, is affected significantly
by the number of deals along with other seasonal
variations like global events (IT boom, Dotcom
Bubble, global financial crisis) and the growth of
the e-commerce sector discussed earlier.
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2. The BFSI industry has the highest R 2 among all
the other industries, suggesting that 96% of varia-
tions are explained by the number of deals. It also
shows a positive coefficient for the independent
variable (number of deals), which means that one
additional deal brings about $28 million of fresh
VCPE investments. The extent of the impact may
be higher compared to IT and ITES because this
industry is more capital intensive.
3. Manufacturing, healthcare, and engineering and
construction, which have been the emerging
industries in the economy, have also shown high
R 2 values of 80%, 88%, and 81%, respectively,
which largely explains the variations in the VCPE
investments in these industries to the extent of the
number of deals. The coefficients for the number
of deals were also positive, ref lecting that one
additional deal would bring about $21 million,
$19 million, and $32 million of fresh VCPE invest-
ments in these industries, respectively. Thus, we
can observe that, although the number of deals
affects the variations in the value of investments
similarly, the extent of the impact is different,
which may be because of the nature of industry,
the various government policies affecting those
industries, and preference of investors toward cer-
tain types of industries.
4. Another interesting observation is that, in the
manufacturing, healthcare, and engineering and
construction industries, the impact of the number
of deals is higher than the most-attractive sector
of IT and ITES ($18 million), which suggests that
encouraging more deals in these industries will
result in faster growth in these sectors as well,
leading to overall growth in the economy. This
can also be validated from the CAGR analysis for
each industry, as done earlier.
5. Shipping and logistics, nonfinancial services, and
others, which together contributed 12% of the
total VCPE investments (see Exhibit 9), also show
high R2 values of 75%, 81%, and 74%, respectively,
explaining the variations in the VCPE invest-
ments. The coefficients of the number of deals
were also positive, ref lecting that one additional
deal would bring about $25 million, $17 million,
and $13 million of fresh VCPE investments in the
industries, respectively. This means that, although
these industries have attracted lower investments,
The Journal of P rivate Equity    91
 they have a direct relation to the number of deals
being effected. Thus, if necessary incentives are
provided to make these industries attractive with
an increased number of deals, it will increase the
value of investments and thereby the growth of the
respective industries.
6. The telecom and media industry shows a relatively
moderate R 2 of 52% to explain the variations in
the VCPE investments in this industry. This is the
lowest R 2 in the given set of industries. At the same
time, the industry shows the highest positive coef-
ficient for the number of deals, ref lecting that one
additional deal would bring about $50 million of
fresh VCPE investments. It should be noted that,
although the number of deals does not explain
the variations significantly, the extent of their
impact is quite high. One possible reason could
be that the number of deals in this industry was
far fewer (4%) as compared to the total deals of the
period, but the investments were around 9% (see
Exhibits 9 and 10) of the total, suggesting that it is
a capital-intensive industry and hence even fewer
deals would significantly affect the value of VCPE
investments. The result also suggests that factors
other than the number of deals would affect the
variations in the value of investments for the bal-
ance of 50%.
7. Another major observation is that, because the
p-value is less than 0.01 for all the industries, the
coefficient is statistically highly significant, and so
we reject the null hypothesis. Thus, we conclude
that number of deals is a significant determinant of
the amount of VCPE investments in all the indus-
tries of the economy, although the extent of the
impact may differ in various industries.
CONCLUSION
VC firms in India play an important role in shaping
the economic growth in the country by promoting
entrepreneurship and innovation. Various factors in
the country, like GDP, FDI inf low, interest rate, and
enabling of stock markets, have contributed to the sig-
nificant growth in VCPE investments in India over the
past two decades (Rajan and Deshmukh [2009]). Along
with this, regulatory policies have been transformed and
reformed over the years, complemented by political
stability, various government initiatives, and a favorable
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exit environment. There have been significant varia-
tions in the VCPE investments in the past two decades,
which were also adversely affected by global events like
the IT boom, Dotcom Bubble, global financial crisis,
and Brexit.
Along with these factors, our regression model
confirms that one of the major factors that affected the
variations in the value of the investments overall was
the number of deals being struck. When comparing the
impact of the number of deals on the value of invest-
ments across industries, we have observed that it has
been a significant factor in the variations in all indus-
tries, although to varying extents. Every percentage
point of GDP growth will need close to $30 billion of
additional capital, according to a Bain analysis (Sheth
and Singhal [2016]). At the current pace of develop-
ment of equity, bonds, external commercial borrow-
ings, and bank credit pools, VCPE investments will
have to double in order to fund the country’s growth.
This means that creating an enabling environment for
VCPE in India will lead to an increase in the number of
deals, which will not only help Indian businesses grow
and thrive by benefitting through the required capital
but will also set the stage for economic growth in the
years to come. Lastly, an important point to be noted
is that although the VCPE industry has adapted to the
growth environment in India, which is principally led by
domestic consumption, it will still largely be affected by
the overall health of the global economy and the invest-
ment climate. This is because the majority of VCPE
investors are still predominantly based outside India.
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The Journal of P rivate Equity    93