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Investments in Indian life sciences sector at all-time high

According to the EY – IVCA monthly PE/VC roundup, 3Q2023 recorded an investment worth US$13.6 billion across 209 deals. Exits were recorded at US$8.6 billion across 85 deals in 3Q2023. The growth in exits was across all deal segments, with IPOs recording the highest growth y-o-y, followed by secondary and strategic exits.

Since 2018, life sciences sector has attracted a significant sum of US$22.1 billion in PE/VC investments, almost equally divided between pharmaceuticals and healthcare. The early years primarily saw growth driven by pharmaceutical investments. However, post-pandemic, healthcare investments have taken the lead.

Vivek Soni, Partner and National Leader, Private Equity Services, EY India, said, “3Q2023 recorded US$13.6 billion in PE/VC investments, 60% higher than the investments in 3Q2022 but 5% lower than 2Q2023. The number of deals in 3Q2023 was lower by 18 % y-0-y.

A pickup in pure-pay PE/VC investments of ~88% bolstered the growth in total PE/VC investments in 3Q2023, which recorded 31 large deals aggregating US$10.7 billion compared to 15 large deals worth US$4.8 billion in 3Q2022.

Growth investments were the highest in 3Q2023 at US$4.5 billion followed by buyouts at US$3.5 billion. From a sector point of view, infrastructure was the top sector in 3Q2023 recording US$3.9 billion on the back of investments in the renewable energy sector.

PE/VC exits were at US$8.6 billion across 85 deals in 3Q2023, the highest in seven quarters. Open market exits accounted for 44% of all exits by value.

In 2023, investments in the life sciences sector are at an all-time high, driven largely by an increasing number of buyouts in the healthcare sector. Strong returns generated by PE funds in recent exits are adding to the attractiveness of the sector for PE/VC funds that are already investing heavily due to the underlying secular tailwinds.

The Indian macro, while showing strong signals in terms of new highs in Index of Industrial production, GST collections, advance tax collections and heightened consumer confidence as we get into the festive season, is increasingly being counter-weighted by a deteriorating global macro, driven largely by recessionary fears in US and Europe.

Geopolitically, the world is suddenly a lot more unstable because of the Middle-East situation that threatens to expand, throwing energy markets into a tizzy.

Any sustained spike in crude oil prices will have a detrimental impact on inflation around the world in general and the Indian economy in particular. All these downside risks need to be evaluated as the Indian PE/VC sector continues its fragile recovery. Start-up sector continues to struggle, with year-to-date investments in startups at a seven-year low.

While there is a funding winter for primary investments in startups, it is not indicative of inactivity on the part of PE/VC funds, as secondary deals are at an all-time high of US$5.2 billion. Likewise, PIPE investments in 2023 are at an all-time high of US$7.5 billion.

The buoyant equity markets have allowed a revival in the PE-backed IPO market which is adding to the improving investment sentiment. Looking at the strong deal pipeline, notwithstanding the increasingly uncertain global macro, we remain hopeful that Indian PE/VC investments in 2023 will surpass 2022 levels.”

Investments
PE/VC investments in 3Q23 were 60% higher than 3Q22 and 5% lower than 2Q23 (US$13.6 billion in 3Q23 vs. US$8.5 billion in 3Q22 and US$14.3 billion in 2Q23) on the back of larger deals.

In terms of the number of deals, 3Q23 recorded an 18% decline compared to 3Q22 (209 deals in 3Q23 vs. 255 deals in 3Q22).

3Q23 recorded 31 large deals (deals of value greater than US$100 million) aggregating to US$10.7 billion compared to 15 large deals aggregating to US$4.8 billion in 3Q22 and slightly lower than 29 large deals aggregating to US$11.7 billion in 2Q23.

The largest deals in 3Q23 include GIC investing US$1.5 billion for a 74% stake in Smart Meters JV with Gemstar Infra, GQG Partners investing US$1.1 billion for an 8.1% stake in Adani Power, and QIA investing US$1 billion for less than 1% stake in Reliance Retail Ventures.

Pure play PE/VC investments (i.e., excluding investments in real estate and infrastructure) recorded US$9 billion, 88% higher than the value recorded in 3Q22 (US$4.8 billion), and a 5% decline compared to 2Q23 (US$9.6 billion). Pure play PE/VC investments accounted for 67% of all PE/VC investments in 3Q23.

On a y-o-y basis, all deal segments, except startups, recorded growth in PE/VC investments. PE/VC investments in startups in 3Q23 (US$1.9 billion across 104 deals) were 32% lower than 3Q22 (US$2.8 billion across 161 deals) and 27% higher than 2Q23 (US$1.5 billion across 111 deals).

Growth investments were the highest in 3Q23 (US$ 4.5 billion across 38 deals) and recorded a growth of 276% compared to 3Q22 (US$1.2 billion across 37 deals). Buyouts were the second highest in 3Q23 (US$3.5 billion across 17 deals), recording a growth of 54% compared to 3Q22 (US$2.3 billion across 13 deals) and 11% over 2Q23 (US$3.2 billion across 13 deals).

Followed by private investment in public equity (PIPE) at US$2.9 billion across 37 deals, an 84% growth y-o-y (US$1.6 billion across 13 deals in 3Q22). Credit investments had the lowest share in 3Q23 (US$808 million across 13 deals) which were 23% higher than 3Q22 (US$654 million across 31 deals) and 16% lower than 2Q23 (US$ 958 million across 17 deals).

The infrastructure sector received the maximum PE/VC investments in 3Q23 (US$3.9 billion across 14 deals) and it grew by 37% over 3Q22 (US$2.9 billion across 20 deals). Industrial Products was the second largest in 3Q23 (US$1.8 billion across 12 deals) mainly due to a single large US$1.5 billion investment by GIC in a Smart Meters JV with Gemstar Infra.

Although not low in comparison to others, financial services, a traditionally favourite sector for PE/VC investors declined by 40% in 3Q23 (US$1.2 billion over 41 deals ) when compared to 3Q22 (US$2.1 billion across 52 deals) due to fewer and smaller fintech deals which are generally favoured by PE/VC investors.

Pharmaceuticals (US$207 million across three deals), logistics and transportation (US$402 million across six deals), media and entertainment (US$269 million across eight deals), education (US$ 296 million across seven deals), and technology (US$1.1 billion across 31 deals), all grew substantially by 774%, 526%, 514%, 293% and 151% respectively in 3Q23.

Spotlight: PE/VC investment trends in the life sciences sector
Over the last five years, PE/VC investments in India’s life sciences sector have demonstrated an impressive CAGR of 24%. The year 2023 has witnessed a historic high in PE/VC investments within the life sciences sector recording US$5 billion to date.

Since 2018, this sector has attracted a significant sum of US$22.1 billion in PE/VC investments, almost equally divided between pharmaceuticals and healthcare.

The early years primarily saw growth driven by pharmaceutical investments. However, post-pandemic, healthcare investments have taken the lead.

PE/VC investments in the pharmaceuticals sector were dominated by growth capital investments, while deals in the healthcare sector were primarily buyouts or startup investments.

Within the pharmaceutical sector, investments were predominantly directed towards the formulation and Active Pharmaceutical Ingredient (API) manufacturers, each accounting for a share of approximately 42%.

The healthcare sector’s investments were mainly centered around hospitals and health tech startups.

Hospitals received the majority share of 62% of all PE/VC investments in healthcare, followed by health tech with a 23% share.

Historically, the PE/VC investments in the life sciences sector focused primarily on pharmaceuticals and healthcare services such as hospitals and diagnostics. However, the past few years have seen emerging themes taking precedence in healthcare.

These encompass digital health, consumer health, self-care, medical devices and technology, point-of-care devices, animal health, drug discovery, and biotechnology.

The growth in PE/VC investments has been driven by a secular demand growth:

Growing healthcare demand is influenced by increasing disposable incomes, heightened health and wellness awareness, and a rise in chronic and lifestyle diseases. The trend has accelerated in recent years.

Two significant factors have driven this transformation. Firstly, the global repercussions of the Covid-19 pandemic prompted a re-evaluation of global pharmaceutical supply chains, benefiting India.

Secondly, government policies, including the Ayushman Bharat health insurance scheme introduced in 2019 and the National Digital Health Mission (NDHM) initiated in 2021, have created favorable conditions for investment.

Key PE/VC investment trends:
1. Shift towards larger deals
Notably, there has been a discernable shift towards larger deal sizes in the life sciences sector. Average deal sizes in this sector have surged from around US$26 million in 2018 to US$84 million in 2023. This substantial increase can be primarily attributed to the growing number of buyouts.

2. Record-breaking buyouts in 2023
The year 2023 has marked a record in the life sciences sector with an impressive count of 12 buyouts, the highest ever recorded in this sector. Among these, the most prominent is BPEA EQT’s US$600 million buyout of Indira IVF, which stands as the largest buyout within the healthcare sector.

3. Landmark deal by Temasek
A remarkable transaction in 2023 involves Temasek’s acquisition of a 41% stake in Manipal Health for a substantial US$2 billion, subsequently raising its overall ownership to 59%. This is the largest deal in the sector in India.

The Temasek-Manipal deal represents of a growing trend of buyouts by global PE / SW funds in the Indian healthcare sector. This trend closely aligns with global patterns where prominent PE firms such as Blackstone, Apollo, Carlyle, KKR, and Warburg Pincus have executed sizeable control deals, primarily concentrated in hospitals, and extending to sectors like nursing homes, health information technology, staffing companies, medical supplies, and health tech.

Prospects of robust returns further fuel the sector’s attractiveness:
The compelling appeal of the Indian life sciences sector is further bolstered by the substantial returns yielded from recent divestments. For example, KKR’s US$2billion exit from Max Healthcare.

In addition to KKR, other noteworthy exits included Everstone’s exit from Sahyadri Hospitals, TA Associates’s exit from Indira IVF Hospital as well as Carlyle’s and British International Investment’s IPO-led exit from Medanta (Global Health) and Rainbow Hospitals, respectively.

Additional factors:
Several other factors contribute to the sector’s attractiveness. Notably, many investors have developed familiarity with these assets due to their rigorous evaluation through multiple rounds of due diligence. Furthermore, these assets consistently demonstrate a high standard of governance.

The sector’s appeal is further enhanced by significant scale expansion, driven by consolidation efforts among major players and brownfield expansion initiatives. Additionally, there is a heightened focus on enhancing service offerings through specialization and implementing cost optimization strategies, leading to improved outcomes such as increased average revenue per occupied bed, improved utilization rates, and enhanced profit margins.

Significant advantages for the healthcare sector with growing PE interest:
The healthcare sector is experiencing pronounced benefits from the rising PE interest, primarily due to its capital-intensive nature and the extended period required to attain breakeven and satisfactory profitability. PE investments provide a substantial financial cushion to the management, allowing them to concentrate on implementing growth strategies that include vital elements such as capital expenditure, infrastructure development, digital solutions, and robust marketing initiatives.

Exits
3Q23 recorded exits worth US$8.6 billion, 104% higher than the value in 3Q22 (US$4.2 billion) and 53% higher compared to 2Q23 (US$5.6 billion). In terms of number of exits, there was a 39% growth, with 3Q23 recording 85 exits vs. 61 exits in 3Q22 and a 16% growth compared to 75 exits in 2Q23. The growth in exits was across all deal segments, with IPOs recording the highest growth y-o-y, followed by secondary and strategic exits.

In 3Q23, open market exits were the highest, with US$3.9 billion recorded across 37 deals with a 69% growth y-o-y (US$2.3 billion across 27 deals in 3Q22). Secondary exits were the second highest, with US$2.3 billion recorded across 17 deals, a growth of 143% compared to 3Q22 (US$ 949 million across nine deals). Strategic exits with 17 deals worth US$1.6 billion were 120% higher than 3Q22 (US$739 million across 23 deals). The deal values were unavailable for 13 out of 17 strategic exits. PE-backed IPOs made a comeback in 3Q23 with 13 PE-backed IPOs having US$787 million in exit proceeds compared to just one in 3Q22 (US$30 million). This is the second-highest quarterly number of PE-backed IPOs.

The largest exits in 3Q23 include Tiger Global and Accel selling a 4% stake in Flipkart for US$1.4 billion to Walmart and BPEA EQT selling stakes in Coforge Limited for US$ 925 million.

From a sector perspective, the financial services sector recorded the highest value of exits at US$2.6 billion across 30 deals in 3Q23, followed by the E-commerce sector with exits worth US$2 billion across 10 deals on the back of the large US$1.4 billion Tiger Global, Accel-Flipkart deal.

Fundraise
Fundraises in 3Q23 recorded a 60% growth with US$2.8 billion raised across 24 funds compared to US$1.7 billion raised across 20 funds in 3Q22 and a 56% decline compared to US$6.3 billion raised across 32 funds in 2Q23.

The largest fundraise in 3Q23 saw Growtheum Capital Partners raise its debut fund of US$567 million. This amount fell just short of its initial fund-raising target, ranging from US$600 million to US$800 million. The fund is intended for investment in various deals across India and Southeast Asia. Mediabrief

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