Will Modi’s Atmanirbhar Package Help Private Equity & VC Players?

Are there similarities to 2008 global crash, when large global stimuli led to quick recovery? No, this is different.

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The main aim of the five-point mega Rs 20 lakh crore stimulus announced by FM Nirmala Sitharaman, which includes the Rs 8 lakh crore already injected by the RBI, is to provide the much-needed cash relief to the stressed sections of the economy – MSMEs, working class, farmers as well as their lenders.

This is going to benefit two major investment themes – consumer and financial services, as more cash would sustain spending, and increased credit guarantees by the government will goad the banks to open up their lending taps. While it’s too early to say, the PE and VC firms focused on these sectors will stand to gain from the recent slew of measures.

Could the Stimulus Pump-Prime Private Market Deal-Making, Which Has Recently Come Under the Cloud?

Despite its jumbo size, the stimulus is unlikely to revive fresh deal-making in the near term. The pandemic has definitely reversed the trend of the last ten years when private capital worth USD 200 billion was invested in India between 2009-2019.

A deal can only happen when there is an agreement on pricing between the buyer and seller. However, there is a disconnect in today’s environment.

On the one hand, the investors (buyers) are demanding valuation haircuts amidst near term uncertainty on the extent of impairment to the target companies and their FY21 numbers. On the other hand, the companies (and their existing shareholders that is, sellers) continue to swear by their long-term projections. This is leading to valuation standoffs between the transacting parties, which is crimping deal making.

Private market investments are reported to have declined by 40 percent YoY in Q1 2020 and Q2 is likely to be worse.

Could There Be Similarities to 2008, When Large Global Stimuli Led to a Quick Recovery?

While investment firms are still hoping for a V-shaped recovery and drawing parallels to 2008, there are certain differences between then and now, which will prolong the path to deal making.

Firstly, this is a calamity in total, not limited to a particular geography or industry. This means that organisations are impacted all across, unlike in 2008 when the disaster was largely contained within the US realty and banking sectors.

Secondly, there is something more fundamental at play. The meltdown of 2008 had coincided with the inception of a new era – the rise of the smartphone. 

Smartphones revolutionised the way we book, shop and pay. The convenience of a ‘click’ heralded a new wave of consumption, which expanded market sizes across industries, bringing many informal segments into the formal fold. Migrant populations from the hinterland took up jobs as drivers, beauticians and even tutors to the urban consumer. Nondescript hotels started getting attention from value-seeking travellers.

Online commerce flourished, luring many into deliveries. Put together, these opened up vistas of investing in the new ‘shared’ economy.

However, the coronavirus outbreak has hit at the very core of this shared economy. Overnight, people have turned afraid to take cabs, go to movies, order food or even call on plumbers. Investing in the post-pandemic world is unlikely to be followed by the emergence of any new secular investment trend, limiting scope to quickly bolster deal pipelines.

How Should Investment Firms Reprioritise Strategies in the ‘New Normal’?

The priorities are undergoing a reset and would vary depending on the stage of investment.

For the venture world, ‘survival’ has become the order of the day. Given their nature, the early stage companies rely largely on equity capital to sustain their weak cashflows. Only this time, the on-tap availability of equity capital will be far lesser. The two big swingers in the Indian venture ecosystem – SoftBank from Japan and the likes of Alibaba, Tencent from China are likely to hit the pause button in the near term, given that the former is already beset with problems on its existing portfolio, and the recent amendments to the Indian FDI policy are going to clampdown on big ticket investments by the latter.

In the private equity world, on the other hand, priorities will shift towards ‘revival’ post-lockdown.

Two portfolio management strategies – cash preservation and contingency planning –are taking centerstage, as businesses hunker down. Investors have started working with their portfolio companies in identifying areas of cost management like renegotiating rentals, reducing excess overheads or even limiting marketing costs. At the same time, focus will be on mitigation of concentration risk like creating alternate bases for production and supplies.

‘Survival’ Followed by ‘Revival’

Nonetheless, irrespective of the nature of investor, ‘survival followed by revival’ would remain the common strategy. Even as that gets underway, another mega wall of liquidity is already beginning to take shape. Just like the Modi government and the RBI, governments and central banks around the world are starting to unleash their respective stimuli – adding up to a massive USD 8 trillion, that is, 10 percent of the world’s current GDP. Sooner or later, this flood of money would start finding its way to global assets, including the private ones in India. But only the stronger ones will survive and live to see another day.

(Vivek Singla is a senior investment professional with a private equity firm. He has 15 years of investment experience, covering both the private and the public markets. A good part of his career has been spent consummating deals in India as well as Southeast Asia. He holds an MBA from IIM-Lucknow, and a B Tech from IIT-Delhi. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)