Perspective
Vision
24(3) 255–259, 2020
COVID-19 and the Indian Private © 2020 MDI
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Equity Industry: Time to Use the in.sagepub.com/journals-permissions-india
DOI: 10.1177/0972262920942047
Dry Powder journals.sagepub.com/home/vis
Kunjana Malik1, Sakshi Sharma2 and Manmeet Kaur3
Abstract
The article throws light on the impact of the pandemic on the major funding industry for the country, that is, private equity (PE) firms.
About 59% of the FDI comes via this route, and growth of major sectors is impacted by their investment. Last few years, there have
been discussions about dry powder availability with the PE firms. This is the time to create opportunity in crisis for both the parties
(the investors and the target firms). As seen during the 2008 crisis, many deals which materialized gave huge benefits to the investors.
The article motivates the industry not to take a backseat and make the best out of the situation.
Key Words
Business Environment, Economics, Management, Management Cases
Introduction rising dry powder. Dry powder is a term used for VC and
PE companies means the funds available for the general
Private equity (PE) and venture capital (VC) investors partners for investing.
have been a vital part of India’s growth story since a long
time. Dhankar and Malik (2015) in their study empirically
proved how companies backed by PE have consistently Dry Powder = Capital
shown better performance compared to other companies in Commitments – Invested Capital
terms of high performance, job creation, growth and tax
revenues. From 2005–2020, there has been an investment The dry powder has been on a rise and being available for
of US$20 mn by the PE and VC industry in India. In 2019, deal making. The Indian government has understood the
there was an investment of US$30 bn. About 59% of FDI importance of the PE industry and has created a conducive
investment in India comes via the PE route. Bordia and environment for the growth of the industry. Some of the
Blau (2015), Bloom et al. (2015), Clarkson (2009) and key recommendations for the industry in the year 2019
Smith (2018) have found out in their studies that PE- and which have also been accepted by the government have
VC-backed firms create more employment opportunities been pass through of end of fund losses of AIFs to their
and pay more taxes compared to non PE-backed firms. Due investors, extension of tax exemptions in IFSC’s to AIF’s,
to the start-up wave, there has been an increase in direct exemption of Angel Tax (Section 56). The same has been
jobs with fresh graduates and lateral recruits joining the accepted by the government. Flagship programmes such as
new firms. With the next generation of entrepreneurs, they Startup India and Digital India continue to improve
are not building on debt. In terms of deal making, there is landscapes for the start-ups.
far more diligence in deal signing. The arrival of the Globally, the PE industry has a record of US$1.5 trillion
pandemic is a time for the PE industry to make use of their cash pile of dry powder or undeployed capital in 2020.
1 Mukesh Patel School of Technology Management & Engineering, NMIMS, Mumbai, Maharashtra, India.
2 Atal Bihari Vajpee School of Management and Entrepreneurship, JNU, New Delhi, India.
3 Jindal Global Law School, O. P. Jindal Global University, Sonipat, Haryana, India.
Corresponding author:
Kunjana Malik, Mukesh Patel School of Technology Management & Engineering, NMIMS, V. L. Mehta Road, Vile Parle, West, Mumbai, Maharashtra
400056, India.
E-mail: kunjanamalik.phd@fms.edu
256 Vision 24(3)
Figure 1. Dry Powder Data
Source: Preqin.
According to Venture Intelligence, private company data VC investments have been concentrated on consumer tech,
tracker, 2019 recorded 86 deals valued at US$36.96 bn software/SaaS, Fintech and B2B customers. Secondary
compared to 937 deals worth US$36.14 bn in 2018. India’s sales have been the leading mode of exits with average
ranking in ease of doing business has risen from 130 in exit value being US$39 bn. Other focus areas have been
2016 to 63 in 2019, boosting investor confidence. As per Foodtech, Healthtech, Edtech, etc. Also, transactions
Figure 1, dry powder has been on a rise since 2000. The known as private investment in public equity (PIPE) help
high rise can be seen post 2015, when the companies companies under distress to raise cash quickly. The buyers
recovered from the global financial crisis and thereby had get shares at discount, and it dilutes the stakes of the
extra capital available for investment. existing shareholders. One of the examples of PIPE in
2008 crisis has been buying of 17% stake of Leonard
Greens and Partners in Whole Foods for US$425 mn which
Changing Landscape of Private yielded a profit of US$1 bn when shares recovered after a
Equity Performance and Statistics few years.
in India
PE companies such as Blackstone, KKR and Carlyle had a Impact of COVID-19 on the
stock piling in cash with rising markets had a record pile of Private Equity Area in India
dry powder. These industries buy undervalued companies
with borrowed money, taking them private to increase The coronavirus pandemic is shutting down entire sectors
operations for an eventual sale. of the economy and putting millions of people out of work,
PE investors can enter through bridge financing, but there is one sector which is finding opportunity among
secondary purchase, replacement equity and leveraged the carnage: PE. Vulture investors, especially in PE are
buyout. But as debt-laden Indian promoters are wanting to waiting in the wings to scoop up scores of struggling
clean their balance sheets and deleverage, PE companies business on the cheap.
are looking for more buyout options. It helps the fund The spread of COVID-19 has had a significant impact
managers to have a better control on the performance of on the economy, with trade and supply chains being
their investments. According to E&Y in 2019, 34% of hampered and domestic consumption demand in affected
all PE/VC investments were via buyout. For 2017–2019, countries and around the world being depressed. There
buyouts were US$26.7 bn in deal value, which was more would be hiccups as the ones are right now. There have
than the value of buyouts in the last 12 years. About 80% of been political issues between 2012 and 2014 when there
Malik et al. 257
Figure 2. Total PE Exits
Source: EY analysis of VCCEdge data.
were scams which brought Indian story down for a year or in deal value to US$2.1 bn in January to March 2020 from
two. But for long-term average, Indian growth story is US$9.1 bn in the same period last year. Exits are an
considered intact making it an attractive destination for the important factor for success of a PE deal. As per Figure 2,
global investors. These are hurdles, not the walls. there has been decline in exits compared to last year.
One of the positive outlook is that some of the best Currently, PE exit through primary market via initial public
companies for investments are within an attractive value offering would be delayed due to subdued environment.
range. Cheaper valuations and positive long-term growth Most of the funds would prefer to wait and get listed at a
projects are the positive side for PE investments, but the later date rather than reconciling to lower valuations. There
funds would be worried for poor corporate governance and have been exits for 15 deals valued at US$321 mn with
exits. Insolvency and bankruptcy code has been introduced 83% of total value of exits through the open market. Exit
which will help in creditors rights being enforced and value in February 2020 was 30% lower than that of January
allowed to be enforced. 2020, when funds exited US$461 mn from their investments.
Though Moody slashed India’s GDP growth forecast for
Largest exit in February 2020 has been Baring India PE sell
2020 to 2.5% and G20 released its GDP forecast for 2020
of 4.9% stake in Manappuram Finance Ltd for US$101 mn.
putting global growth at –2.2%. Even so according to G20,
Current low valuations might interest few India-focused
India would have highest growth rate of 2.2% in 2020.
funds to invest in companies for opportunistic bets.
Many of the deals have closed in 2020 like TA Associates
investment in Accion Labs and Vivriti Capital which got
350 cr from LGT Lightstone Aspada. The pandemic The Road Ahead
quickly turned into an economic crisis. The pandemic has
influenced two kinds of shocks: a health shock and an Main factors to look forward are as follows:
economic shock. Rapid global spread of the virus lead to a
significant downturn in the capital markets around the 1. With the onset of economic uncertainity, how to
world, bringing high volatility to home markets of global accurately determine the price or value of the new
and regional fund managers and sovereign wealth funds deals?
and pension funds that had been investing US$100 mn in 2. If COVID-19 constitutes a ‘material adverse
India. Though intrinsic value of business are strong, effect’, or will it be considered as ‘ material adverse
valuations are expected to lower. General partners have change’?
been trying to negotiate changes in fund documents to
adjust for the effect of pandemic. They are looking for For PE deals in listed companies, regulatory floor price is
flexibility to offer more solution in the form of redeploy- computed on average of weekly high and low stock prices
ment of proceeds in the portfolio companies or expand of target company during lookback period of six weeks
investment strategy. Investments made by PE firms are from the date of shareholders approving the deal. As the
expected to give them higher returns than in an upcycle, impact of COVID-19 has been recent, the pre-COVID-19
but the most challenging area would be exits for the firm. period would be taken as lookback period resulting in floor
The firms which would garner interest are Edtech, price being higher than the current market price. As a
Healthcare, insurance, digital and automatic opportunities. number of listed company deals are under negotiation, they
As for now, general partners would be focused on their may not take off until the stock price improves or lookback
current portfolios, helping the company management in period comes within the COVID-19 space bringing down
business continuity. As the news stuck, there has been fall the regulatory floor price. SEBI has asked for public
258 Vision 24(3)
comments to reduce the lookback period to two weeks for being brought is a debate between life and livelihood.
stressed companies. Though the extent of the impact would Being a consumption-led economy, a large amount of inves-
vary across different sectors, a general slowdown is bound tments can be expected in India. This is the time when PE
to impact all sectors. It is going to be a challenge for companies can use their dry powder and bring capital to the
investors to correctly value their target business. table, restructuring debt, preserve jobs and help the
MAE/MAC clauses are provided in the PE deals and are managers lead the company through for the coming
a condition precent to closing. Until now, no MAE has months. As long as a PE firm has dry powder and knows
occurred prior to closing of transaction. It provides inves- how to source deals, there are plenty of opportunities
tor an option to walk out of the deal. It is beneficial for the available. It is time to learn from the 2007–2008 crisis
target company as well. It ensures that value on basis of when many opportunities that existed were lost as things
which investor has agreed to invest is protected and the looked bleakest.
business risks in case of unforeseen circumstances would
be allocated between the investors and the target company. Declaration of Conflicting Interests
MAE is influenced by factors such as sector to which the
target company belongs, negotiation power of the parties The authors declared no potential conflicts of interest with respect
and its requirement. The implementation depends on quan- to the research, authorship and/or publication of this article.
tum of economic impact of COVID-19 and the durational
significance on the business of the target company. Funding
Investors can explore investing in convertible instru- The authors received no financial support for the research,
ments, with conversion linked to future performance of authorship and/or publication of this article.
target company. In the current scenario, regulatory floor
price is expected to be low so investors can invest in
tranches, giving them an option of not to invest further in References
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with US$162 mn across nine deals. About the Authors
Dr Kunjana Malik (kunjanamalik.phd@fms.edu) is an
Conclusion engineer and a gold medallist in MBA Finance, and a
doctorate from Faculty of Management Studies, University
COVID-19 has created many challenges for PE investors
of Delhi. She was awarded Junior Research Fellowship by
for deals which were in advanced stages of negotiation.
the Government of India to pursue research and success-
But it has also given an option to invest in companies
which had a steep fall in their revenue and are in the need fully published several papers in her field of private equity
of financing. Investors can reap benefits of the economic research in ABDC journals at National/ International level.
uncertainty with the right investment strategy backed by a She has experience of more than 11 years being an edu-
sound transactional structure. Huge opportunities exist in cationist teaching financial econometrics, business analy-
sectors such as education, healthcare, FMCG and financial sis, investments and valuation. She has worked in reputed
services which can withstand economic and social uncer- institutions like Shaheed Sukhdev College of Business
tainties with robust business structure. COVID-19 can Studies and is currently working with Mukesh Patel School
accelerate the growth in India’s e-health market with predi- of Technology Management and Engineering, Narsee
ctions of reaching around US$16 bn by 2025. The impact Monjee Institute of Management Studies, Mumbai.
Malik et al. 259
Dr Sakshi Sharma (sakshisharma.phd@fms.edu) has a Dr Manmeet Kaur (manmeetkbawa@gmail.com) has a
PhD from Faculty of Management Studies, University of PhD from Faculty of Management Studies, University of
Delhi. An ex-probationary officer from SBI, she specializes Delhi. Her specialization includes corporate governance,
in the area of banking and finance. She has several papers in financial markets and services and investment management.
national and international journals of the ABDC list to her She has been teaching these subjects to the students at
credit. Her areas of interest include financial markets, various institutions since 2011. She has published articles
investment analysis, risk management and banking. She is in various international and national journals in the area of
also a visiting faculty of finance at various colleges in governance and banking. She has also presented many
Delhi. She has also been a resource faculty at various papers in various international and national conferences
faculty development programs being conducted for faculty. organized by Top B- schools and other organizations. She
She takes keen interest in financial modelling and data anal- has also been a resource faculty at the faculty development
ysis using EViews, Stata and R. She is currently associated programmes being conducted for faculty in multidiscipline
with Atal Bihari Vajpee School of Entrepreneurship and areas from all over India. Currently she is working with
Management, Jawaharlal Nehru University, Delhi. Jindal Global Law School, OP Jindal Global University.
