By Nishant Sharma
Equity investments in SMEs: As India aspires to become a $5 trillion economy, the pivotal role played by SMEs and the investment opportunities they present cannot be underestimated. Globally, SMEs account for 90 per cent of all businesses and 50 per cent of employment. The impact of SMEs becomes even more pronounced when informal SMEs are considered. In emerging economies like India, they contribute to 45 per cent of the total industrial production, 40 per cent of the total exports and a substantial 37.54 per cent of the country’s GDP.
Earlier this year, India defied global downward trends by topping the global stock exchange rankings in terms of the number of IPOs. Indian exchanges recorded an impressive 80 listings in the year-to-date 2023, marking a remarkable 33 per cent increase over the IPOs in the first half of 2022. The surge is largely attributed to SME IPOs.
Also read: Why investing in socially-driven MSMEs is important for investors
Historically, private equity (PE) firms have homed in on larger and more established enterprises in developing economies. However, the World Economic Forum has identified a persistent financing gap for businesses requiring between $50,000 and $2 million in external capital. PE firms can step in to create lasting institutions and foster economic growth.
Empowering SMEs and driving the fintech revolution
The rise of fintechs and the adoption of technology has enabled the lending value chain, improving financial access for underserved “credit-hungry” customers, which includes SMEs. The digital lending market in India is expected to grow to $515 billion by 2030, spurred by models like P2P lending, SME financing and short-term credit. Private equity firms can capitalise on the evolving digital lending landscape and expand their presence in the fintech sector. They can leverage innovative financial solutions to support SMEs and facilitate their growth. PE-VC firms have invested almost $17.8 billion in Indian fintech companies between FY 2019 and the first half of FY 2023.
In today’s market, technology integration is a key driver for SME growth, and PE firms recognise this potential. They are driving value creation by aiding SMEs with their digital transformation. PE investments in fintechs enable them to fund technology initiatives in the field of Artificial Intelligence and Machine Learning to design tailored financial products based on customer data. It has led to the creation of SME-focused financial platforms that empower SMEs to leverage technology solutions by boosting their credit access.
In the healthcare space also, investors can create value by identifying mid-market enterprises that are poised for growth. SMEs operating in various healthcare domains, including healthcare providers, pharmaceuticals, diagnostics and specialised healthcare facilities, have become increasingly attractive for investment since 2020. In 2022, India’s healthcare sector witnessed deal values reaching $4.3 billion, marking a significant milestone. During the same year, healthcare accounted for nearly 16 per cent of the total exit value, reaching $3.5 billion.
Also read: Challenges in Raising Debt for MSMEs
Unlocking the potential of Indian SMEs
India’s SMEs offer vast untapped opportunities that go beyond capital injection. By leveraging opportunities in SMEs, businesses can build high-quality teams and enhance their go-to-market strategies, improve governance, financial accounting, digital transformation, and other critical drivers of business success. Private equity investments help establish robust systems and processes for SMEs through active participation on the Board or in partnership with management.
Talent development in SMEs thus becomes an area of focus for PE investors. It translates into improved productivity and an enhanced value proposition to consumers, ultimately driving profitability. India requires continued focus on policies to support SME growth and increase credit availability to them through both banking and non-banking systems. India can thus build high-quality companies to serve the global market.
Nishant Sharma is Founder and Managing Partner of Kedaara Capital. Views expressed are the author’s own.
