More than half of the respondents in the private equity and venture capital space see investments in India declining in the next 6-12 months, according to a survey conducted by Crisil Research.

The survey, conducted between May and June this year, received responses from 26 independent funds and respondents.

Over the next one year, private equity (PE) and venture capital (VC) players will focus on managing existing portfolios and will be less aggressive on new investments, the credit rating agency said.

The negative expectations, however, drop sharply to just 15 per cent for a longer-term view.

“Only 23 per cent of investors expect investments to rise in next 6-12 months; 69 per cent expect a rise in the next 12-24 months,” said the agency in a report.

Good investment opportunities rare

With companies’ performance declining, Crisil observed that the risk of investment loss increases.

“Good investment opportunities are rare and finding them becomes critical. On the other hand, disruptions like these trigger or hasten innovation, attracting investors to the market,” it added.

Per the agency’s findings, 66 per cent of the respondents expect an uptick in M&A (mergers & acquisitions) activity, only 28 per cent expect a decline in next 6-12 months.

M&As for inorganic expansion and strategic exits will rise as firms put capex (capital expenditure) plans on hold.

Fund-raising to decline

Almost 90 per cent of the respondents expect fund-raising to decline in the next 6-12 months.

“With enough dry powder at the global and pan-India levels and few attractive opportunities for capital deployment, funds are not expected to raise money. New entrants may find it difficult to raise money as limited partners (LPs) would prefer to stay with experienced general partners (GPs) and funds,” reasoned the agency.

Decline in exits

A good 67 per cent of the respondents expect a drastic reduction and 28 per cent, a marginal decline in exits in next 6-12 months. This moderates to a total 44 per cent expecting only marginal decline in 12-24 months.

Crisil said: “Exit options were limited and would continue to be limited given the pandemic-led uncertainty in growth. PE and VC funds may opt to stay invested longer to achieve desired returns.”

In the next 6-12 months, a whopping 80 per cent of investors expect portfolio performance to decline, particularly in terms of financial stability, making it imperative for them to focus on on existing investments.

In the next 6-12 months, 43 per cent of investors will focus on managing existing portfolios; 58 per cent expect new investments to decline.

The agency underscored that differentiated solutions and a correction in valuations are key expectations as nearly 70 per cent investors look for innovative business solutions and strategies and/ or lower valuations when making new investments.

V-shaped recovery

While India’s GDP is expected to decline 5 per cent in FY21, Crisil has projected a V-shaped recovery in GDP growth with average 7 per cent compounded annual growth rate (CAGR) over FY22-24.

When it comes to corporate profitability, the agency assessed Ebitda (earnings before interest, taxes, depreciation and amortisation) to fall faster than revenue and credit metrics weakening across sectors.

When it comes to behavioural impact, Crisil sees lower discretionary spending, increased adoption of technology and higher penetration of e-commerce services.

Significant growth in 5 years

PE and VC investments grew significantly over the past five years (from about $15 billion as of FY15 to about $40 billion as of FY20), but have trended down since the fourth quarter of fiscal 2020. Investments in first quarter of fiscal 2021 was very low excluding outlier investments raised by Jio platforms, the agency said.

Further, monthly investments in the last four months -- from March to June, were 60-70 per cent lower than the monthly average of the last three years.

The top sectors by investment deal volume in FY20 were: financial services, technology and IT, e-commerce, and foods and consumer. The top sectors by investment value in FY20 were: infrastructure, financial services, real estate and e-commerce.

“70 per cent list liquidity as the top risk, followed by 58 per cent for both muted consumer demand and change in consumer behaviour. Over 75 per cent investors look at optimising manpower and operational expenses for managing performance,” the agency said.

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