How Ownership structures changed in VC/PE invested Indian Unlisted Companies

Public markets are currently witnessing an all-time high. This is despite the economic gloom and doom expectations across many geographies. The growth expectations for India are in a better shape than other places around the world.

Even though the GDP (Gross Domestic Product) per capita may be low in India, according to the PPP (Purchasing Power Parity) estimates, the overall size of the economy has risen to become the third largest economy. There is a consensus when it comes to the overall India growth story in the long term. The IMF (International Monetary Fund) projects a growth of 8.5% for India till 2027, however, the OECD (Organisation for Economic Co-operation and Development) projects a more conservative 5% growth rate till 2040.

Within India, the public market representation is miniscule as only about 6000 companies are actively traded across the exchanges. Therefore, private markets certainly need a closer look. From a funding perspective, it is interesting to look active investing is happening especially into private markets and how ownership structures have changed in private companies over the years as a result.

Private company incorporations

It might not be obvious, but private markets definitely hold the key to accelerated growth. When it comes to incorporations, unlisted markets are no less than hyperactive. With close to 154k private companies incorporated in 2021 alone, private company incorporations are certainly at a historic high.

The primary money flowing into private unlisted markets are at historic highs. Since 2012, there is a 10X increase in primary funding into unlisted companies. The average deal sizes have increased from 32 Cr in 2012 to 148 Cr in 2021. Among investor types that are active in the private sector, we can see VC/PE deal values and volumes at an all-time high. However, a point to be noted here is that hardly 1 in 150 companies get any institutional backing.

The ownership in private companies with institutional investors and HNIs has witnessed an aggressive growth since 2012. During the same time however promoter holding has almost halved on average from close to 82% in 2012 to 43% in 2021.

Meanwhile VC/PE ownership has also increased almost 5x times since 2012 and HNI has stabilized at 15% on average, especially over the recent years.

Private unlisted company incorporations have been consistently growing in recent years. The annual private company incorporation in 2021 was 55% higher than what it was in 2012. Of the total 2 million+ private companies in India, 1 million+ have emerged in the last 10 years alone. A significant proportion of the newly incorporated companies had first time directors.

Even with such increase in startup activity, only a micro fraction of all the incorporated companies secures any institutional funding. As observed before, only 1 in 150 companies get any backing. But for the dip in 2020, VC/PE funding volumes have remained on a growth course. The number of companies funded by VC/PE has almost doubled over the last 10 years. Whether these deal volumes will hold in the current year is yet to be seen.

Ownership among VC/PE funded startups

At PrivateCircle, we took a sample of 2400+ companies that had at least one institutional round and was incorporated since 2011 and analysed their shareholding pattern over the years. The ownership % of promoters among VC/PE funded companies have progressively reduced since 2011. The promoter ownership % holding is now less than half of what they were in 2011 on average.

VC/PE % holding has raised more than 5X since 2012, the ownership increasing consistently YOY for over 10 years. Ownership by other shareholder types has remained flat over the recent years. The HNI ownership doubled from 2013-2016. Till 2016, VC/PE and HNI ownership have remained similar. However, since 2016, VC/PE have increased their ownership aggressively on average. On average, HNI ownership remained stable since 2016.

According to our report, about 150k companies are incorporated every year. However, out of these, hardly 1000 get VC/PE backing. This indicates a large room to grow the deal volumes. While the institutional investors continue to bet aggressively, at least during 2018-2021 period, the HNI investors continue to provide much needed liquidity to the unlisted market. With a large head room for funding, efficient deal discovery and closures are necessary at company, institution and individual investor levels. Will 2023 be the year for other shareholder types including HNIs and Family offices to come to the fore and fund more start-ups? We need to wait and watch!

(The author is Mr. Murali Loganathan, Director Research, PrivateCircle.co and the views expressed in this article are his own)