Coronavirus impact: Indian PE and VC investments as well as exits headed for sharp drop in 2020, says EY

Indian private equity and venture capital investments in 2020 are expected to crash by up to 60 percent, a direct upshot of the wrenching grip of novel coronavirus, or COVID-19, on the economy and businesses, said a new study.

PE and VC investments — including sectors such as real estate, infrastructure and credit — are presaged to settle in the range of $19 billion to $26 billion this year, dropping by45-60 percent from the 2019 levels of $48 billion, according to the study by EY, an advisory firm.

The waning appetite of PE investors and VC in deals is bad news for enterprises looking to raise money and ride out the troubles sown by the virus.

Bad news for deals
The gloomy outlook doesn’t end there. PE and VC exits are also expected to drop by 50-67 percent compared with last year, meaning deal making will move at a snail’s pace in 2020, according to the report.

Monthly Indian PE and VC investments slipped below the $1 billion mark for the first time in the past three years in March, falling to $818 million. Exits stood at $1.1 billion largely due to one mammoth deal — the offer for sale worth $1 billion by PE investors in the mega SBI Cards IPO. Fund raising has also taken a hit in March with the total amount pegged at a mere $85 million.

A senior investment banker with a global advisory firm said PE exits through the primary market route via initial public offerings will be delayed due to the current subdued environment. “Rather than reconcile to low valuations, most funds will prefer to wait it out and push for listing at a later date,” he said, asking not to be named. That said, according to this person, the current low valuations may nudge a few India-focused funds to invest in companies and take opportunistic bets.

In the absence of a widely accepted vaccine for COVID-19, it is near impossible to predict the duration of the pandemic and the extent of the consequent economic damage. So what’s Plan B for PE funds and venture capital firms?

Both types of investors are expected to focus on the business continuity of their portfolio companies and rely on private investments in public equity transactions in the near term.  Growth capital investments and structured credit deals are likely to be the flavour of the season, according to the EY report.

“At present, private equity funds are focused on mentoring portfolio companies. I expect that in a few months, they will start deploying their dry powder as several companies will need cash and deals will be re-priced. The trajectory will vary by sector,” says Cyril Shroff, Managing Partner at law firm Cyril Amarchand Mangaldas.

Yogesh Singh, a senior partner at law firm Trilegal, expects many structured, special situation and distress deals to materialise because businesses will need to continue and tide over these (difficult) times. “Assuming the lockdown is over, bridge financing and mezzanine (mixture of debt and equity) deals will pick up quite a bit in the third quarter,” he said.

Bye-bye buyoutsAdditionally, buyout activity may be muted until the end of the third quarter/beginning of the fourth quarter of 2020 and is likely to be led later by conglomerates eager to divest non-core businesses, said the study. “Buyout deals in any case take longer to consummate. In today’s scenario, neither the buyer nor the seller is sure about the correct price as business realities have drastically changed and need to be re-assessed. The level of due diligence will also be much higher in a control transaction and will take longer. Deal discussions may continue, but announcements are likely to get delayed,” said Deepak Sharma, MD and Head (M&A) at Axis Capital.

In terms of sectoral themes, the EY report has picked technology, consumer goods, pharmaceuticals as well as sub-sectors such as medical supply and services, biotech, agricultural products, chemicals, edtech and e-commerce as the first to find favour with investors. Investments in sectors like financial services, fintech, infrastructure, real estate and healthcare are expected to slow down, it said.

Ultimately, experts believe a lot depends on timely and well-coordinated action from the central and state governments.

“Over the next two quarters, we expect more clarity to emerge on the spread/control of the epidemic, removal of restrictions, revival of demand and supply chains and government response by way of fiscal and policy stimulus,” said Vivek Soni, Partner and National Leader for Private Equity Services, EY India.