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Deloitte Private Newsletter: May 2020
COVID-19, like a typical black swan event, has taken the world by complete surprise. What started off as a health issue, is now snowballing into an economic crisis; with the entire world staring at a long-lasting global recession.
Public policy measures for containing the spread of COVID-19 are resulting in significant operational disruptions for companies. Staff quarantine, supply-chain failures, orphaned and/ or unavailable inventories, and sudden demand reduction from customers are creating serious issues for companies across a far wider range of sectors than initially anticipated. A number of companies now face weeks, if not months, of exceptionally poor trading conditions. For most, the revenue lost during this period represents a permanent loss, rather than a timing difference and is putting sudden, unanticipated pressure on working capital lines and liquidity.
2019 was a record year for private equity (PE) with investments touching US$41.2 billion; thereby, significantly surpassing investment levels of the last four years. Going by the data on PE deals for the first four months of 2020 and based on discussions with PE funds across the entire spectrum, it appears that 2020 will be an unfortunate aberration for PE on all counts—new investments, fund raising, exits, or the health of portfolio companies. The moot question now is: “what is the medium- to long-term outlook for the PE industry and what is going to be different in the post COVID-19 world?”
The questions doing the rounds revolve around managing deal flow, the criteria for portfolio selection, managing fund raising, Limited Partner (LP)- General Partner (GP) negotiation, interpretation of legal clauses, and the recent tweaks in the FDI regulations. Even with uncertainty glaring at the entire investing community, some early trends have surfaced, which have been summarised in the report.