Over the past 15 years, worldwide economic activity and asset formation have shifted to the unlisted sector. According to World Bank data, despite significant growth in GDP, the number of listed companies worldwide has not changed since 2006. Whereas in the previous 20 years, their number had doubled.
During this period, the inflow of funds from private equity increased and the size of deals also increased. Now even big companies are getting equity capital without getting listed in the stock market. Whereas earlier companies were listed only at a relatively early stage. These days, there are reports of privately raising funds worth more than $ 50 billion.
A few months ago, upon receiving information about the rapid growth of private equity in the country, we started marking such unlisted companies which have a valuation of more than one billion dollars. Such a tech startup is known as Unicorn. We wanted to understand what impact these companies are having on the economy. According to some research institutes, the number of such companies was 35, while at the same time we had estimated that if the investigation is done in a more subtle way, then this number will increase by at least a dozen. Surprisingly we found a hundred such companies. At the same time, after the release of our report, the opinion found that despite this we missed some companies.
The US and China have more unicorns than India but they also have more listed companies with market capitalization of more than one billion dollars. There are 2,825 such companies in the US and 2,126 in China while only 335 in India. In such a situation, unlisted companies are more important for India’s economic growth.
We started selecting companies by setting some benchmarks and retrenchment from 50,000 unlisted companies that had higher profits and strong growth. Because of this, they will be able to raise the cash required for reinvestment and they will not need additional finance. Similarly, a better estimate of the value of a loss-making company can also be found from the funds investing in them. Detailed discussions with large private equity firms were necessary to intensify the process. We then fired firms that were once unicorns but later lagged behind or are subsidiaries of listed companies, multinational bodies or reputable business groups.
The region-wise mix of hundreds of companies that have emerged as a result is full of diversity. In addition to broad-based e-commerce, fintech, education and technology (edtech), food-supply and mobility companies, we have to offer software services (SAAS), gaming, non-banking finance, renewable energy producers, modern trade, distribution and logistics. , All areas like biotechnology and medicine were found. In countries with mature economies where the annual growth rate is in single digits, the growth required to become a unicorn can be achieved only with the help of technology.
GDP growth in India has been in the double digits for a long time and can be seen in those areas which are expanding or where formalization is taking place. In such a situation, some companies in our list are also in the traditional business world like jewelery, textiles and packaged food.
Of these, two-thirds of the companies started after 2005 while only 63 companies of BSE 500 started in this century while 180 were started before 1975. This is an unprecedented development where companies are moving fast. While valuations may fluctuate in the near future, we believe that we are still at an early stage in shaping the business landscape of the country. A company takes seven to 10 years to unicorn after its inception and new startups and funding have gained a lot of momentum in the last five years. In such a situation, more such companies can come forward in the next five to 10 years.
There are many reasons for this to happen but the most important is private equity which in most cases is foreign. India is among the most backward countries in the world in terms of per capita income. Earlier in an article I have discussed that the supply of private capital is less in the phase of development in India. It is also more risky for capital savers. Most of the existing developed countries relied on foreign capital when they were emerging markets. For example, in the first half of the 19th century, America received help from European countries such as England, France and the Netherlands. Most of it was in debt and it started a cycle of economic boom and decline. In India, this amount is coming in the form of equity and private equity funding has outpaced public and market funding every year in the past decade. The rise in private equity funding globally has helped. This level has also increased in India.
The growth of companies has been faster than normal due to the availability of risky capital. The only remaining option of faster achievement is the excess of debt. If the project is successful, the owner is rich and if it fails, the bank also suffers. Indian industrialists were also rapidly creating new companies in the 1980s. But three quarters of all paid-up capital was in government companies. Until the advent of liberalism in 1991, the capital per private company was quite low. Even then, few groups had the risk capital to start new businesses. After the advent of private equity, the first generation of traders started taking risks. This changed the business scenario of the country.