Analyzing The PE/VC Investment Outlook In The Wake Of The Second Covid-19 Wave

by / Tuesday, 22 June 2021 / Published in News & Updates

India started experiencing the severity of the second covid-19 wave from March 2021. Deal-making activity in the country has witnessed a subdued undertone since the outbreak of the second pandemic wave. A study released by consulting firm EY and industry lobby Indian Venture Capital Association (EY-IVCA) stated that the pandemic adversely affected the momentum of deal activity in terms of volumes.

The study pointed to the fact that PE and VC investments in the country were pegged at USD 7.5 billion in April 2021, a rise of 37% from USD 5.5 billion in March 2021. and up 6.5 times as compared to USD 1.1 billion in April 2020, when the first coronavirus induced nationwide lockdown was imposed by the government. However, the buoyancy in deal values was not reflected in deal volumes as investors adopted a cautious outlook and subdued sentiment. Compared to 105 deals in March and 76 in April last year, deal numbers in terms of volumes fell to 67 in April 2021.

The rise in deal values in April 2021 has been a result of 15 large value deals raising USD 6.1 billion in terms of inflows for Indian corporate entities. The round of investments was led by Blackstone committing to acquire a controlling stake in Mphasis for USD 2.8 billion with co-investments by Abu Dhabi Investment Authority (ADIA), UC Investments and GIC. The EY-ICVA report further reiterated that pure play PE/VC investments recorded an exponential rise in value at USD 6.8 billion as compared to USD 4.5 billion in March 2021 and USD 930 million in April 2020.

VC funds continued to bet highly on tech-led sectors like edtech, fintech and SaaS while the interest of funds in the PE space was largely focused on acquiring companies through controlled transactions. This offers PE players operational and strategic control of assets and a seamless exit option. Key examples of PE funds entering into controlled transactions is the acquisition of a majority stake in special ingredients player Calibre Chemicals by Everstone Capital, controlling stake in RA Chem Pharma and ZCL Chemicals by PE investor Advent International.

Sectors which have been resilient to the adverse impact of the second wave of covid-19 include chemicals, pharmaceuticals, construction, healthcare products and auto components. Sectors which have emerged as laggards are travel, entertainment, textile, airlines, hotels, banking and steel.

A marked decline in PE/VC investment activity in terms of numbers can also be attributed to the fact that a large number of Indian companies are leveraging the Initial Public Offer (IPO) route to raise capital. Companies like Supriya Lifesciences which were earlier in discussions with PE funds have also opted for the IPO route for better valuations. Over the next few months, the country is likely to witness an IPO rush. These recent filings are in addition to more companies which had filed documents earlier and are waiting to go public. With the second covid-19 wave ebbing significantly and the secondary market traversing a correction trajectory. there is heightened interest among retail investors to subscribe for quality IPOs.

Experts have opined that the second wave of covid-19 has adversely impacted the rural sector in the country. The domestic rural economy has played a pivotal role in the sustainable development and economic growth of India. Rural India displayed a marked resilience and tenacity to the outbreak of the first covid-19 wave with households recording strong demand and consumption. However, the second covid-19 wave has led to a loss of income sustenance and demand in rural India which is not likely to witness an uptick in the near future. It is anticipated that investors will adopt a wait and watch approach to observe how the rural economy traverses the path to recovery before taking any major investment decisions.

India’s macroeconomic fundamentals continue to be strong and its is one of the fastest growing economies in the world. The government should continue steadfastly on its path of fiscal and economic reforms to ensure that the pace of deal-making activity picks up and India strengthens its position as a global investment destination.