This article is written by Anupam Bhaduri pursuing a Diploma in Mergers and Acquisitions, Institutional Finance and Investment Laws (PE and VC Transactions) from LawSikho.
Table of Contents
Introduction
If we are to rely on the history as witnessed in the past ten years, private equity funds have been supported by a decade-long growth through means of transactional volumes, fundraising, and valuations. However, it has been a year now that the COVID-19 set in, and it would not be an exaggeration to state that the confidence of investors has decreased owing to the erosion of the value of investments. Now that the pandemic has brought the country to a standstill with the onslaught of a second wave and a third wave is in tow, the PE funds can expect to see a shortage in deals in the short term. Hence it can be aptly stated that the future for the next decade shall be set largely on how the fund managers react to these eighteen months.
Difference between the recession of 2008-9 and the pandemic downturn
The crisis faced by the fund managers 2008-09 is significantly different from the present situation. Even during this crisis, the PE funds have a significantly large amount of unused funds that were raised but are lying unutilized at this point. This fund alone can help provide liquidity to the businesses that are facing a cash crunch. It is also noteworthy to add that a good part of this particular fund in question shall be reserved for the emerging markets in India. 
PE deals in the new normal
The fund managers at this point are wary of the pandemic’s ramifications. It is still uncertain as to how long the pandemic will prolong but it is safe to say that the possible backlashes will stay far more than the anticipated twelve to eighteen months. However, new trends that have emerged and have the potential to shape the PE venturing in the future are listed below.
Ensuring adequate safety of existing portfolio
In terms of crisis when the whole world is unsure of the future, the best option is to play “wait and watch” while taking adequate care that you do not waste what you already have. This is why the fund managers will, for now, be inclined to retain and secure their current portfolios from any severe ramifications. This might be achieved in the form of an additional infusion of equity, providing bandwidth to the team that is already waging wars on multiple fronts and bridge financings. Hence it can be safely concluded that providing adequate and immediate assistance shall be the first and the foremost pointer for the PE funds.
Deferring of deals
From the above-mentioned point, we can also infer that the PE funds shall be paying close attention to the business potential of their business targets. The significant M&A volume that forms the lifeblood of a PE fund shall be performed by conglomerates who are looking to demerge their non-core businesses. It also expected that bolt-on acquisitions shall take precedence.
Leveraged buy-out
In simple words, a leveraged buyout is one where the company acquiring the target company borrows funds to finance the acquisition. The assets of the target company are used as collateral. At this point, banks are undergoing a difficult phase in securing the loans that have already been defaulted. Hence advancing for new debt-financing opportunities does not seem a doable option to the bank and this is where the PE funds come in, With the huge amount of capital that the PE capitals raised that before the onset of the pandemic and the majority of which remain underutilized or even untouched in most cases shall bring in an abundance of such buyouts.
Settlements of valuation conflicts
One of the chief problems that the COVID has thrown the world into is a disruption in the financial markets worldwide. The pandemic has ruptured the growth of the stock markets and the market volatility is at an all-time high. This also reflects in the valuation of assets during buyouts. While it is common knowledge that PE funds, unlike public investments, are less prone to be affected by market fluctuations. However, with a change in valuation, PE funds will face difficulties since buyers will be reluctant to pay a high price where assets are prone to nosedive in value.
Changes observed in the due diligence process
Due diligence forms the backbone of any deal before it even takes place. Under the present circumstances, the scope of due diligence will have to be increased to accommodate unpredictable and disruptive situations.
Increase in the demand for expertise in the sector
With the ramification of the pandemic becoming clearer and the fund managers taking cautious steps, formulation of capital growth policies and proper implementation of sectoral intelligence will be the key improvement that will come to play. This is further obvious that PE funds will now be looking to step into certain sectors as they will see aggressive expansion in terms of M&A transitions.
PIPE transactions
As the ramification of the pandemic are being processed and fund managers are making efforts to adapt to them, we can state with certainty that PE funds and Venture Capitalists shall be eagerly inclined to participate in more PIPE deals. Public companies will also be looking forward to this because the economy has stalled significantly and realizing crowdfunding will become difficult in these scenarios. It is expected that PE funds will make a quick move to liaise with the public entities as the super-performers of yore try to pull in some quick cash and foreign portfolio investors (FPI). This serves as a very probable opportunity for PEs because the company will also be looking forward to redeeming the pressure they are seeking in their home market.
Sectoral increase for PEs and VCs
Private equity funds will be keenly awaiting to step into the domains of technology, consumer goods such as packaged foods, food processing, and personal healthcare. The health industry will also be one of the primary places will opportunities to invest in attractive terms will spring up for PEs due to an abundance of sub-sectors like medical supply and services and biotech to follow suit. Everything and anything that is remotely linked with being online will also receive a huge impetus, such as ed-tech industries, online streaming platforms, and retail online business.
On the other hm sectors that had been booming until now like infrastructure, real estate, fintech, restaurant chains, apparel industries and anything in the non-essential consumer belt will take a significant time before they can find traction. As the world is being pushed into a ‘fight and survive’ mode, we can clearly understand the impact it is going to place on the non-essential consumer goods industries.
Formation of more special situation funds
Historically, many leaders of quality industries were opposed to raising funds in a manner that was seen up until now as ‘expensive’ structured debt. However, now the occurrence of specialized funds and multi-strategy PE funds will stimulate an increasing amount of deal flow in the upcoming years. In fact, it would be safe to conclude that there will be an increase in the usage of convertible instruments by the PE fund managers.
Conclusion
As is evident, the pandemic has merely changed the way deals were carried until now. While there will be a short-term reduction in the number of deals being made, this period will also see the giants of the industries increasing their bandwidth through M%A deals and the chief source of financing will remain PE funds.
References
- https://home.kpmg/in/en/home/insights/2020/06/private-equity-in-the-time-of-covid-19.html
- https://www.mondaq.com/india/operational-impacts-and-strategy/948710/impact-of-covid-19-on-private-equity-in-india
- https://www.protiviti.com/IN-en/insights/pov-impact-covid-19-guide-private-equity
- https://www.privateequityinternational.com/covid-19-adds-fuel-to-indias-private-equity-explosion/
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