Due to Covid, exits from companies are likely to decline in the next six-12 months as investors are expected to remain invested in companies for a longer period to achieve desired returns.
As investors have pulled back from actively backing in companies amid Covid leading to a sufficient amount of dry powder (un-invested capital) available with them, the need for additional fundraising by them is expected to decline in six-12 months. Almost 90 per cent of the private equity (PE) and venture capital (VC) investors are not expected to raise money while new investors may find it difficult to raise money as limited partners would prefer to stay with existing and experienced investors, according to a Crisil survey. Given that PE-VC investments have declined in the first quarter of FY21 (excluding massive fundraise by Jio Platforms) from previous three quarters, investors are staying more focused on existing portfolio companies to help them navigate through the pandemic impact. This has left them with enough capital to deploy.
For more than half of the investors surveyed, the decline in investments is likely to continue for the next six-12 months as “companies’ performance declining, risk of investment loss increases. Good investment opportunities are rare and finding them becomes critical,” Crisil said. The survey received responses from 26 investors during May and June this year.
Due to Covid, exits from companies are also likely to fall for the next six-12 months as investors are expected to stretch their holding period in companies to achieve desired returns. According to the survey, 95 per cent investors claimed decline in the number of exits with 67 per cent of expecting a drastic reduction. As a result, M&As for strategic exits and expansion will increase in the short term according to 66 per cent investors.
“With exit options limited because of weak capital market and low interest in secondary transactions from other funds, investors would look at M&As as a strategic route to check out,” said Rahul Prithiani, Director, Crisil Research.
Among the top sectors, which would attract investors’ interest in the next 12 months, were e-commerce (58 per cent investors’ interest) followed by healthcare (46 per cent), B2B tech and IT (38 per cent), industrial along with financial & insurance (35 per cent each) etc. However, liquidity and cash flow issues, muted consumer demand, changing consumer behaviour, supply chain and logistics issues, and changes in the economic environment were the top factors posing the greatest risk to portfolio companies in the next 12 months, according to investors.