3 minute read 20 Apr 2020
Private investors respond to COVID-19

How will PE/VC investors respond to COVID-19?

Authors
Vivek Soni

EY India Private Equity Leader

Strategic thinker and leader. More than 22 years of experience in M&A advisory, Private Equity investing, structured finance and running a PE portfolio company. Passionate biker and avid traveler.

Amit Khandelwal

Ernst & Young LLP India Strategy and Transactions Managing Partner

Leader of Strategy and Transactions in India. Focused on diligence. Go-getter. Numbers enthusiast.

3 minute read 20 Apr 2020
Related topics Private equity COVID-19

With the COVID-19 global outbreak and stipulation of lockdowns, the Indian PE/VC investments in 2020 are expected to be at US$19-26 billion, a reduction of about 45% -60% from the 2019 levels.

The COVID-19 pandemic has caused severe dislocations across markets, and with many countries under lockdown, economic activity has contracted significantly. The central government has extended the nationwide lockdown till 3 May and has indicated its inclination to permit resumption of some economic activity under strict guidelines in ‘green’ zones.  However, there is still a lot of uncertainty around: 1) the future trajectory of COVID-19 in India, 2) a holistic understanding of its ramifications on the global and Indian economy; and 3) the near-term economic trajectory of the country. 

While these uncertainties may continue to remain for some more time, our hypothesis is that there will be a significant reduction in Indian PE/VC investment and exit activity in 2020 as compared to the preceding year.

In 2020, PE/VC exit activity is expected to see a significant slowdown till there is a recovery in asset prices and economic activity. PE/VC funds are more likely to hold portfolio positions for longer, work through the crisis and sell in better times as opposed to selling at deeply discounted valuations.
Vivek Soni
EY India Private Equity Leader

PE/VC investments:

  • In the near-term, we expect most General Partners (GPs) to remain focused on their current portfolios, helping their company managements in ensuring business continuity and be in ‘wait and watch’ mode on new investment activity.
  • As clarity emerges, in the near-term, we expect PE/VC investors to do more private investment in public equity (PIPE) deals relative to what was done in 2019.

PE/VC exits:

  • PE/VC exits in 2020 are expected to shrink considerably from 2019 levels, and as per our initial estimates, be 50%-67% lower than the 2019 level of ~US$11 billion.
  • PE/VC funds are more likely to hold portfolio positions for longer, work through the crisis and sell in better times as opposed to selling at deeply discounted valuations. This may lead to significant increase in hold periods which shall impact Internal Rate of Returns (IRRs) negatively. Similar trends were also observed post the GFC.

PE/VC fundraising:

  • Fundraising is expected to slow down materially as limited partners (LPs) rebalance their asset allocations and gravitate towards tried and tested GPs with track record of delivering returns to LPs across cycles.
  • Nascent GPs, first time fund managers, and spin-offs may find it difficult to raise capital in this environment. Consolidation of the Indian PE/VC sector is expected to continue as GPs with multiple funds under their belt find better success at raising capital from LPs.

Summary

PE/VC exits are expected to reduce by 50%-67% % to below US$5 billion, adds the study. Highlighting how GPs will manage the crisis in 2020, the study states that they will give more attention to the business continuity of their current portfolio companies, seek attractive private investment in public equity (PIPE) transactions and are also likely to favour growth capital investments over buyouts.

About this article

Authors
Vivek Soni

EY India Private Equity Leader

Strategic thinker and leader. More than 22 years of experience in M&A advisory, Private Equity investing, structured finance and running a PE portfolio company. Passionate biker and avid traveler.

Amit Khandelwal

Ernst & Young LLP India Strategy and Transactions Managing Partner

Leader of Strategy and Transactions in India. Focused on diligence. Go-getter. Numbers enthusiast.

Related topics Private equity COVID-19