Covid-19 impact: Private equity slows down, zooms in on portfolio companies

Future targets to include financial services, retail companies; Top PE firms shut offices about a week before lockdown; key execs and principals now entirely on phone, video-conferencing

As primary capital markets face a battering over the lockdown due to the coronavirus 

pandemic, alternative asset managers are rewriting how they locate deals, manage their portfolio companies, and engage with promoters of potential targets.

Top private equity firms had shut offices around a week or so before the country officially did and key executives and prin­cipals are now operating through telephone calls and Zoom-ena­bled video-conferencing. Deals that were past the stage of due diligence are still being transacted but early stage ones have halted.

One executive with an American PE firm said the focus was on cash preservation for the next three mo­nths, and protecting costs structures for portfolio firms, given the tight liquidity and risk aversion banks have. “Institutions may say they will appropriate Rs 200 crore in credit but when it comes down to taking that money, the disclaimer suggests two tranches or over a period of time,” the executive said, adding that his firm has told portfolio companies’ senior managers to take a pay cut so that immediate advances can be made to lower-rung staff for emergency shopping.

Renuka Ramnath, founder and CEO, Multiples Alternate Asset Management, said the outbreak had stymied certain facets of the PE business with specific regard to doing diligence and having outreach meetings with portfolio companies and the management of target firms.
 

Despite high-tech replacements for meetings, somethings don’t have a proxy. “Almost 99 per cent of Indian companies don’t upload their balance sheets and financials and, even if they do, those have to be tallied with hard copies, which can’t be exchanged through couriers and delivery like earlier,” said the executive with the American firm. "The last thing anyone wants with these markets is to catch a falling knife."

 

That said, the combination of substantial dry powder and highly leveraged promoters in the system may be a once in a decade shopping opportunity for those players who can move fast enough to close a deal. “There are many opportunities in sectors such as health care, FMCG and the financial services, with robust businesses that can withstand economic and social uncertainties over the long term,” said Iqbal Khan, partner with law firm Shardul Amarchand Mangal­das & Co. Investors say they see large companies going through the grind, as their promoters struggle with liquidity because they are levered up at the holding company level and are starting to get margin calls thanks to the crashes in the stock market, and in the next six months, the targets that will come up for PE companies will make for a harvest season like never before. 

“Several businesses are going to need to raise fresh equity if they are to get fresh credit, which means PE infusions are going to be unavoidable,” Ramnath said. “The current disruption would also ensure that only fit companies would be around.”

Another investor with a top-ranked international firm said while this may be a perfect time for option-traders and hedge funds, its important to wait at least 60 days. "When it comes to a U-shaped recovery, you don't want to be the one who got in on the left side of the U,” he said.  Presently, there is no shortage when it comes to funds.

Vivek Soni, leader for EY India’s PE Services practice, said most in­vestors are long on India because of its growth-speed. “Yesterday, Moo­dy’s slashed India’s GDP growth forecast for 2020 to 2.5 per cent and the G20 released its GDP forecast for 2020, putting global growth at -2.2 per cent. Even so, according to the G20, India is expected to have the highest growth rate of 2.1 per cent in 2020," he said. The point is once this pandemic recedes, notwithstanding the projected knock down of India’s real GDP growth rate, investors will find ample opportunities. 

Pankaj Naik, head of the digital and technology practice at investment banking firm Avendus, said they advised on a couple of deals which closed (TA Associates Invest­ment in Accion Labs and Vivriti Cap­ital which got Rs 350 crore from LGT Lightstone Aspada) but has seen the volumes of deals reduce all aro­und. “Deals may not be happening  but the scrutiny on potential targets is on.”