Zephyr Peacock India, the India affiliate of New York headquartered Zephyr Management L.P. has made 20 investments in early growth stage businesses across financial services, agri-tech and infrastructure ancillaries since 2006 in India, with an investment of $120 million to date. Zephyr Peacock India Growth Fund targets to invest in three to six SMEs in the next 12 months. In an interview with BusinessLine, Pankaj Raina, Managing Director, Zephyr Peacock India said, alternative investments sentiment will be subdued, funding will slow down by 30-40 per cent in 2020 and recovery is likely in the next 12-15 months.

Given the outbreak of the Covid-19 pandemic, how would you rate institutional investor sentiment in the next 6-12 months?

Investor sentiment will be subdued and cautious. You will see institutional funding slowing down by 30-40 per cent over the next 6-12 months as compared to 2019. Investors in general would be more careful and follow a risk weighted approach to fund deployment. Existing portfolio companies will take top priority for most funds, with a firm focus on cash conservation to survive longer. Investors will also urge their portfolio companies to hire good quality talent at affordable CTCs, which will be more easily available in these trying times.

Funds will look to invest in businesses with lower cash burn and longer operating runways. Companies with sustainable business models which are unit economics positive, with good margin contribution profiles will take priority for investors. You will see a correction in valuations across the board, leading to higher shareholding for the investors, more governance rights, tracking KPIs actively instead of passively and seniority of rights vs existing investors.

Which sectors will attract the most investments?

In the light of the current pandemic, Calendar Year 2020 and Financial Year 2021 have not gone as planned for investors or companies alike. Start-ups, which usually require high risk capital, have suffered the most as investors are sceptical in the current scenario because it is not possible to either conduct management meetings or diligence in person. Moreover, it is not possible to determine the business position accurately. The markets are very fluid and so is the way consumers are purchasing and engaging with different products and services. For instance, restaurant ordering has witnessed a huge decline as a result of which distribution channels such as Swiggy and Zomato are finding alternate ways to engage with their customer base.

Online retailing has witnessed significant growth. As we talk to certain companies, we understand that within foods, convenience/packaged foods have witnessed a significant uptick in demand. The pandemic has accelerated India’s digital adoption. Products that cater to necessities and business models that adopt digitisation are the ones that will generate the maximum investor interest. Sectors such as healthcare and pharma are evergreen in my view.

Likewise, digitally enabled models such as Ed-tech, Agri-tech, Fintech, Logistics and Allied Services will continue to attract investor attention. The pandemic has proven the need to build an inclusive economy. In my view, investment theses across the industry would focus on digitalisation to integrate supply chains across industry verticals that cater to the domestic consumption growth.

Will the investments be made in early stage, mid-stage or growth stage firms?

I expect deal activity across all these stages over the next 12-18 months. Companies overladen with debt will seek investors/corporates for a bailout. Late stage investments will be made after investors ascertain the pandemic’s implications on these businesses. Within early stage models, businesses with high cash burn and nil revenues will find it difficult to raise capital.

However, start-ups with proven traction and unit economics will continue to attract investor attention. In terms of value, I believe mid-stage investments will account for a major portion of the total deal flow by value once investment activity resumes at full swing. Funds with capital shall be able to find quality businesses at attractive terms (particularly valuations) and these businesses with the help of capital should be able to generate significant traction and gain market share from unorganised sectors/smaller players who don’t have easy access to capital. Struggling businesses across early, mid and late stages would be available for consolidation via mergers and acquisitions, which is already happening.

In the case of early stage start-ups, I also believe acqui-hiring will pick up.