Impacted by the Covid-19 pandemic, Indian private equity and venture capital investments are projected to fall by 45-60 per cent in 2020, from the year-ago levels, according to a study by EY.

PE/VC investments in 2020 are now expected to be $19 billion to $26 billion. The impact is on account of the lockdowns and restrictions on travel and normal business activity, which had disrupted the country’s economic trajectory.

PE/VC exits are also expected to reduce by 50-67 per cent from 2019 levels.

At $818 million in March, monthly Indian PE/VC investments fell below the $1-billion mark for the first time in the last three years. Exits stand at $1.1 billion in March, due largely to a single large $1-billion deal. Fund-raising has gone cold, with March recording just $85 million in fund raises, the report said.

The Covid-19 pandemic has caused severe dislocations across markets, and with many countries under lockdown, economic activity has contracted significantly. The Indian government has extended the ‘lockdown’ to May 3 and has indicated its inclination to permit resumption of some economic activity under strict guidelines in ‘green’ zones,” Vivek Soni, Partner and National Leader for Private Equity Services at EY India, said.

“However, there is still a lot of uncertainty around: the future trajectory of Covid-19 in India; a holistic understanding of its ramifications on the global and Indian economy; and the near-term economic trajectory of the country,” he added.

PE/VC investments fell by over 50 per cent (both y-o-y and sequentially) to $5.1 billion in the first quarter of 2020. On a monthly basis, after a decent January ($2.5 billion), investments fell significantly in February ($1.7 billion) before hitting a three-year monthly low of $818 million in March.

Most of the deals announced in February and March were on the back of significant work done in the preceding six-nine months.

Travel restrictions and lack of in-person meetings have significantly slowed down deals that are in process. These deals will be revalued if not cancelled once the lockdown restrictions are lifted and more clarity emerges on future revenues and rebooting of supply chains, among others.

Exits

In 2019, PE/VC exits added up to $11.1 billion, spread across open market exits ($4.6 billion), secondary deals ($2.5 billion), M&As ($1.9 billion), buy-backs ($1.9 billion) and IPOs ($0.25 billion). In 1Q2020, PE/VC exits increased by 59 per cent, compared to 1Q2019, due primarily to the large $1-billion offer for sale by PE investors in the SBI Cards IPO. However, compared to 4Q2020, exits have declined by 43 per cent.

The PE/VC exits in 2020 are expected to shrink considerably from 2019 levels, and according to initial estimates, will be 50-67 per cent lower than the 2019 level of $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 would impact Internal Rate of Returns (IRRs) negatively. Similar trends were also observed post the GFC.

PE/VC fundraising

The fundraising is expected to slow down materially as Limited Partners (LPs) rebalance their asset allocations and gravitate towards tried and tested General Partners, with a 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 greater success at raising capital from LPs.

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