Covid-19 impact: VC, PE-VC exit deals tumble in Q1 2020

It is not only the funding for start-ups that has crashed due to the pandemic, but also the number of private equity-venture capital (PE-VC) and venture capital (VC) exit deals, in the first quarter of 2020.

According to data from Venture Intelligence, a firm that tracks private companies’ investments, financials and valuations, the number of PE-VC exit deals fell to 33 in calendar year Q1 2020, the lowest in the past 10 years. The number of VC exit deals also fell to 16, the lowest since Q3 2015.

“Till early February, the impact was largely felt in China, but as the pandemic spread globally, there were numerous travel advisories and subsequent lockdowns. This led to limited activity by investors starting mid-February,” said Ashish Sharma, CEO of InnoVen Capital India, a venture debt and lending platform.

PE-VC investments are like investing in stock markets where investors wait for a good return on the investment. During a crisis, the valuations of invested companies tend to decline, and hence, exits are likely to slow as sellers wait until markets stabilise before divesting their assets, said Anuj Golecha, Co-founder of Venture Catalysts, an incubator for start-ups. “If you look at the past trends, after a crisis situation, average holding periods increase among private equity-backed portfolio companies,” Golecha added.

PE-VC exits data include exits via mergers and acquisitions (M&A) and open market transactions. While M&As include deals such as buyback, strategic sale and secondary sale purchases, open market transaction exits include public market sale and PE-VC backed initial public offerings (IPOs).

VC exits constitute the same factors, but only for exiting investors corresponding to VC investments, which typically include Seed to Series D investments in companies less than 10 years old and the investment rounds being capped at $20 million. Exits generally happen to give early investors or founders and employees opportunities to get some liquidity.

“Starting Q1, IPO markets started to evaporate, as investors started pulling money out of emerging markets. Given Covid-19, both funds and corporates also slowed down – funds started to emphasise on existing portfolio companies and corporates wanted to ascertain their own cash positions before placing new bets,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India, a firm that provides growth capital and management support to small and mid-sized enterprises in the country, adding, “Even bankers were not able to sign new mandates. Existing deals in the pipeline stalled as the valuation scenario was cloudy, and given the impact of Covid-19 on the overall economy, it became difficult to ascertain the true business or profitability and cash position of companies willing to sell.”

As far as PE and VC players are concerned, they are investing in growing their businesses instead of giving exits to existing investors. This will be the norm in the coming quarters, said Padmaja Ruparel, co-founder of Indian Angel Network and founding partner of IAN Fund.

The amounts involved in the exit deals though, have not dipped as much, the data showed. On a year-on-year basis, for PE-VC exit deals, the amount in Q1 2020 was $2.3 billion, over 47 per cent higher than in Q1 2019, and for VC exit deals it was $353 million, the same amount as in Q1 2019. So, while there were fewer exit deals during the period, they were of larger ticket sizes.

But based on the current situation, investors said there will be a slowdown in exit activity, because of weak capital markets and reduction in secondary exits this year.

“We don’t expect much activity on the IPO front which used to an important source of exit, particularly for PE investors. There may however, be more M&A activity driven by industry consolidation, and stronger companies will look for acquisition targets,” said InnoVen Capital’s Sharma.

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