As major capital markets face foreclosure crisis due to coronavirus
In the event of a pandemic, alternative asset managers rewrite the way they locate transactions, manage their holding companies and interact with promoters of potential targets.
Major private equity firms closed their offices about a week before the country’s official start, and key leaders and directors now operate via phone calls and videoconferences with Zoom. Transactions that had passed the due diligence stage are still being negotiated, but those at the early stage have ceased.
An executive from a US PE company said the focus was on preserving cash for the next three months and protecting cost structures for holding companies, given tight liquidity and risk aversion of banks. “The institutions can say that they will appropriate a crore of Rs 200 in credit, but when it comes to taking this money, the warning suggests two installments or over a period of time,” said the executive. , adding that his firm had told senior executives of the portfolio companies. take a pay cut so that immediate advances can be made to lower level staff for emergency purchases.
Renuka Ramnath, Founder and CEO of Multiples Alternate Asset Management, said that the epidemic has thwarted certain facets of PE activity with respect specifically to due diligence and holding outreach meetings with portfolio companies and management of target companies.
Despite high-tech replacements for meetings, some do not have a proxy. “Almost 99% of Indian companies do not download their balance sheets and financial statements and, even if they do, they must be compiled on paper copies, which cannot be exchanged by mail and delivery as before”, a said the executive. with the American firm. “The last thing anyone wants with these markets is to grab a falling knife.”
That said, the combination of substantial dry powder and highly leveraged promoters in the system can be a once-in-a-decade buying opportunity for players who can get around fast enough to close a deal. “There are many opportunities in sectors such as healthcare, consumer goods and financial services, with strong companies that can withstand long-term economic and social uncertainties,” said Iqbal Khan, partner of law firm Shardul Amarchand Mangaldas & Co. According to investors. they see big companies going through the grind as their promoters struggle with liquidity because they are lifted to the holding company level and start receiving margin calls through the stock market crashes, and over the next six months , the goals that will come for PE companies will do for a harvest season like never before.
“Several companies are going to have to raise new capital if they want to get new credit, which means EP infusions are going to be inevitable,” said Ramnath. “The current disruption would also ensure that only fit businesses are present.”
Another investor with a leading international company said that while this is a great time for option traders and hedge funds, it is important to wait at least 60 days. “When it comes to a U-shaped recovery, you don’t want to be the one who entered the left side of the U,” he said. Currently, there is no shortage of funds.
Vivek Soni, leader of EY India’s PE service practice, said that most investors are waiting for India because of its speed of growth. “Yesterday Moody’s cut India’s GDP growth forecast for 2020 to 2.5% and the G20 released its GDP forecast for 2020, placing global growth at -2.2%. Even so, according to the G20, India should have the highest growth rate of 2.1% in 2020, “he said. The fact is that once this pandemic has receded, notwithstanding the expected decline of India’s real GDP growth rate, investors find many opportunities.
Pankaj Naik, head of digital and technology practice at the investment banking company Avendus, said he advised two transactions that were concluded (TA Associates Investment in Accion Labs and Vivriti Capital which obtained Rs 350 crore from LGT Lightstone Aspada ), but saw the transaction volumes decrease all around. “The agreements may not be in progress, but the examination of potential targets is in progress.”