Domestic Financial Institutions Poised to Transform India’s Private Equity Market

BY COMFORT OGBONNA

Financial institutions, including insurers and pension funds, are expected to take on a far more significant role in India’s private equity sector as policy support for long-term domestic capital continues to strengthen, according to Krishna Ramachandran, managing partner at TVS Capital Funds.

Industry data indicates that domestic investors already account for more than half of the capital flowing into India’s Category I and II alternative investment funds, which serve as the closest benchmark for private equity and venture capital fundraising. As of March 2025, these investors represented 52.7% of the total capital, reflecting the growing importance of local sources of funding.

Much of the inflows have historically been driven by high net worth individuals, family offices, and public and private institutions. However, contributions from insurers and pension funds remain modest, leaving substantial untapped potential for long-term domestic capital to reshape the market landscape.

“The government itself is investing 1 trillion rupees ($10.88 billion) through the Research, Development and Innovation fund,” Ramachandran said at the Indian Venture and Alternate Capital Association conclave in Mumbai. He emphasized that such sovereign backing has the potential to strengthen confidence among institutions, encouraging them to consider larger commitments to private equity and other forms of long-duration investments.

TVS Capital Funds, which manages commitments of approximately 70 billion rupees across various funds, has historically focused on raising rupee-denominated capital, supporting domestic enterprises, and attracting investments from more than ten financial institutions, including major banks. Despite this, insurers have so far deployed less than 1% of their permitted allocation to alternative investment funds. Investments from the Employees’ Provident Fund Organisation (EPFO) and the National Pension System (NPS) remain negligible, suggesting that broader participation could unleash a massive pool of long-term domestic capital while reducing reliance on offshore funding.

Insurance companies, in particular, have considerable room to increase their allocations. Current regulations from the Insurance Regulatory and Development Authority of India (IRDAI) allow life insurers to invest up to 3% of their controlled funds and general insurers up to 5% of investment assets in alternative investment funds, yet the industry has used only a fraction of this capacity. Private equity has the potential to generate significantly higher returns compared with conventional treasury portfolios, which is especially advantageous for life insurers managing long-term liabilities.

Ramachandran also highlighted that pension funds and NPS capital could become the next major source of long-duration capital. The Pension Fund Regulatory and Development Authority is developing a framework that would allow these entities to invest in alternative investment funds, potentially unlocking a portion of India’s massive 70 trillion rupee ($762 billion) pension pool. If realized, this could transform the private equity landscape by introducing a substantial base of patient, long-term domestic capital.

Even as the institutional investor base is poised to grow, certain segments of the market are facing challenges. Lending, for instance, is under pressure due to stress across private and listed financial services firms. Nonetheless, Ramachandran expressed a positive long-term outlook for lending and financial services. TVS Capital continues to focus strategically on financial services, enterprise technology, and manufacturing, while taking a measured approach to investing in artificial intelligence.

The firm recently made a notable investment in Neysa, an AI cloud platform startup, alongside global investment giant Blackstone. This move signals TVS Capital’s ongoing commitment to supporting innovation while balancing risk in emerging sectors.

As India’s private equity market continues to evolve, the increased participation of insurers, pension funds, and other domestic institutions could fundamentally change the way long-term capital flows, creating new opportunities for growth, stability, and higher returns in the years to come.