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PE & VC deal-making set for additional dip in June quarter

BENGALURU: Private equity (PE) and venture capital (VC) investments, which were already down 20-40% during the March quarter, are expected to come to a grinding halt in the June quarter as many investors put deals on hold as they see the impact of Covid-19 on the economy, stock markets and specific sectors as well. Several deals are also on hold because of logistical issues, like getting tax certificates or travel for due diligence, while in few extreme cases investors are also pulling out of deals.
Over 78% of investors think it is a bad time for deals across early stage and growth capital, according to a survey of 100 PE and VC firms conducted by Indian Venture Capital Association (IVCA) and Praxis. Investors expect a significant pause in deal making in the June quarter, even as they wait and watch how sharp fall in economic growth impacts business outlook and the slide in stock markets translates into sobering valuations.
“Some companies will get impaired but there will be others who remain as investable, if not more, because valuation expectations will be more reasonable. What will be tougher to figure the capex cycle because there will be a setback, as companies won’t be confident to invest additional capital till they are confident about existing capacity utilisation,” said Padmanabh Sinha, former chairman of industry body Indian Venture Capital Association (IVCA).

Besides slowdown in new investments, 45% of investors also think that growth for existing portfolio companies for the next two years will remain lower as compared to FY20, while another 89% think the plans for an IPO or exit will have to be delayed, according to the IVCA survey. For investors like US buyout major KKR, the priority is to close the existing transactions already in final stages, besides helping portfolio companies make sure their employees are safe and they have enough liquidity to go through the next three-to-six months of uncertain period.
“There will also be a structural, longer-term change in consumer behaviour because of this crisis so we will have to help portfolio companies adapt to the new reality. We are looking for new opportunities thoughtfully, especially companies which need short and long-term capital solutions, which can be taken forward once the crisis blows over,” said KKR India CEO Sanjay Nayar, who added that the government has an opportunity to unveil big reforms for manufacturing and financial services sector.
Investors are also advising their portfolio companies that raising money over the next quarter will be difficult, and terms of a transaction may not be favourable. Financing deals led by existing investors to help companies tide over the crisis are expected to increase in the coming months, as will cost cuts including layoffs as business drops.
“It’s more important to optimise for company runway (time before companies run out of cash) than valuation at this point. A “flat round” that extends your runway to at least 12 months is a good outcome in these times,” advised top VC firms like Sequoia Capital India, Accel India, SAIF Partners, Lightspeed Venture Partners, Matrix India, and others to startups through their collective effort Action Covid Team (ACT). Several top VCs and entrepreneurs have also written to the government for a relief package for the startup sector, including bankrolling part of employee salaries besides rent and tax relief.
Some founders are already facing a tough time raising money. A Gurugram-based founder told TOI that two angel investors who were participating in funding for the startup have pulled out of the deal. “Another investor is making up for the amount they were investing, but one cannot assume a transaction is closed till the money is in the bank in this climate,” said the founder, who requested anonymity.

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