Pandemic-hit PEs, VCs to opt for M&A route to check out: Report

Investments declined 45 per cent in February and 70 per cent in March, over the average monthly investments in the past three fiscals, according to Crisil. "As much as 90 per cent private equity (PE) and venture capital (VC) investors see a decline in fund-raising activities over the next 6-12 months because of the pandemic, cutting short the strong growth spell PE-VC investments have seen in recent past," the Crisil survey of 26 investors said.

The capital crunch that the COVID-19 pandemic has created coupled with lack of exit options through the equity market route may force PE/VC investors to look for merger and acquisitions to cash out their investments, says a Crisil report. Projecting such a surge in merger and acquisitions-based exits over the next one year or so, involving private equity funds and venture capital finds, the report attributed same to the disruptions caused by the pandemic. Barring the fund raising spree by Reliance Industries for its Jio Platforms, of which as much as USD 9.5 billion from PEs alone, the first quarter of FY2021 saw very low traction.

PE-VC investments by value was down 60-70 per cent in the first quarter, excluding the outlier Jio fund ramp of around Rs 1.2 lakh crore. On July 3, Reliance said Intel Capital became the 12th investor to join the list of marquee firms to have invested in Jio Platforms since April 22, taking the total investment amount in the telecom firm to Rs 1,17,588.45 crore. PE-VC investments have grown from USD 15 billion in FY2015 to USD 40 billion in FY2020 and the figures would have been even higher, had February and March not been pandemic-hit. Investments declined 45 per cent in February and 70 per cent in March, over the average monthly investments in the past three fiscals, according to Crisil.

"As much as 90 per cent private equity (PE) and venture capital (VC) investors see a decline in fund-raising activities over the next 6-12 months because of the pandemic, cutting short the strong growth spell PE-VC investments have seen in recent past," the Crisil survey of 26 investors said. The refrain is it will be downhill from here this fiscal, with some sustained interest in business strategies at lower valuations and sectors largely unaffected, or benefiting, from the pandemic, notes the survey and points out that this is despite the market sitting on sufficient un-invested capital, or dry powder, and good investment opportunities are seen difficult to find in the current environment. "About 58 per cent of the surveyed expect investment value to decline over the coming 12 months, but about half of them see a moderate recovery thereafter, while a fifth foresee a strong recovery. Two-thirds see M&As rising over the next 6-12 months, extending up to the next 12-24 months when over three-fourths of them a rise in M&As over 2019," says the survey.

Commenting on the survey findings, Rahul Prithiani, a director at the agency says, "with exit options limited due to weak capital markets and falling interest in secondary transactions from other funds, investors may look at M&As as a strategic route to check out. "M&As with stronger players may be the more-likely option subject to demand contours and growth opportunities, the extent of synergy, and availability of capital for acquisition." This will also see investment decisions getting delayed given the due-diligence criticality and including new parameters for evaluation in the post-pandemic world, he says.

Activities will be limited to segments minimally impacted by the pandemic or those with promising opportunities, such as technology, e-commerce and healthcare, says the survey. However, over a longer term, these segments would see positive structural changes, which will drive stronger growth due to changing consumer behaviour. It can be noted that e-commerce, technology, IT and IT-enabled services, financial services, and lately, infrastructure and real estate have been dominating domestic the private investment market for many years. Healthcare is a key sector that will garner even more interest and attention after the pandemic.

Anjali Nathwani, an associate director at the agency says overall, while a wait-and-watch will be the approach, focus will be on niche opportunities and lower valuations in sectors with good growth prospects. "What's is good is that over 60 per cent investors have expressed confidence that the country will continue to attract international funds within the Asia-Pacific region over the long run," says Nathwani.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)