New Delhi, April 24 (IANS) Despite the liquidity and profitability issues during the coronavirus crisis, private equity and venture capital firms are likely to hold on to their portfolio positions during the crisis period and sell them later in an improved economic environment, according to an EY report.
In 2020, exit activity is expected to see a significant slowdown till there is a meaningful recovery in asset prices and economic activity, it said. Exits by these funds will be 50-67 per cent lower than the 2019 level.
The report on the likely impact of COVID-19 on the Indian private equity and venture capital funds, noted that the funds would want to sell their portfolios when the economic situation would be better and valuations would improve.
“PE/VC funds are more likely to hold portfolio positions for longer, work through the crisis and sell in better times as opposed to selling at deeply discounted valuations that the current uncertain economic environment may warrant,” it said.
It may lead to significant increase in hold periods which shall impact Internal Rate of Returns (IRRs) negatively.
However, the report said, some funds, that are at the tail end of their lives, may not have the ability to extend their hold periods and may be contractually forced to offer exits to their limited partners. This could lead to an increased incidence of portfolio sales to specialist secondary funds, it added.
The report further said that investment by private equities and venture capitals is likely to fall 45-60 per cent in 2020 to $19 billion-$26 billion from the 2019 levels.
“In the near-term, we expect PE/VC investors to do more private investment in public equity (PIPE) deals relative to what was done in 2019. As valuations in the public markets have corrected significantly, PE funds should be able to move quickly as quality listed businesses attempt toshore up cash and as foreign portfolio investors (FPIs) look to reduce theirpositions as a result of redemption pressures in their home markets,” said the report.