Venture capital awaits with dry powder to go shopping. The crisis of coronavirus has left a fishing ground for cheaper companies and funds are hoping to have a little more macro visibility to shoot their new investments. According to a study by Bain & Company, managers calculate that they will starting pistol with prices between 10% and 20% cheaper.
According to a survey by this strategic consultancy firm among venture capital managers operating in Spain, around 50% of investment team managers do not foresee that the economic recovery will return to pre-crisis levels before 2022. This is due, according to their responses to the slow return to activity of some of the sectors hardest hit by the pandemic, such as leisure and tourism or non-food retail. In fact, a third of the funds expect these sectors to be the most affected by the coronavirus.
With this regret on their backs, the managers agree that the Covid-19 will negatively affect the valuations of the companies. On average, they expect declines of between 10% and 20%, although the most pessimistic ones anticipate a deterioration of more than 20%. According to Cira Cuberes, a Bain & Company partner in ‘private equity’ and co-author of the report, “most likely, the funds will look towards stronger and less cyclical sectors ”. In this sense, he believes that companies in the health sector are the ones that are expected to have a more positive impact on their valuations, "with the exception of retail." He too food sector It will have favorable trends, "especially those subsegments that work well in periods of crisis, such as the white label.
This behavior would have an important lever effect on the Spanish economy, since at the end of 2018, the consumer goods, ‘retail’ and health sectors represented more than 40% of investments in Spain.
The activity of the funds will start, at the earliest, at the end of 2020. Despite the fact that a large part (50%) of the funds are already looking for new opportunities “actively”, around 40% do not expect activity resume until the end of this year, and another 10% point to no earlier than the end of 2021. “While the vast majority of internationally focused funds are already looking for companies, those with a focus mainly in Spain are more conservative and prefer to wait for the minus a couple of months ”, details the barometer.
THE ROLE OF PRIVATE MARKETS IN THE POST-COVID ERA
In the last two decades, and especially since the great financial crisis, private or unlisted markets have been gaining prominence among investors, especially among institutional ones. According to consultant Willis Towers Watson, the universe of private markets has tripled since 2007, from $ 2.5 trillion to 7.7 billion current. In the moments before the bankruptcy of Lehman Brothers, unlisted assets were equivalent to 3.8% compared to public or listed markets, although now they represent 6.3%. For example, global pension funds have increased their exposure to assets such as venture capital, private debt, real estate or infrastructure to levels of 26% on average, from 19% in 2008.
During the coronavirus epidemic, venture capital funds have gone through several phases. First they were on the defensive, and now they are already in offensive mode. According to the BlackRock Investment Institute, quality companies that have lost bank financing may need “Liquidity bridges” while their operations recover. The fund giant predicts that the Covid-19 ‘shock’ will generate a large distressed (or ‘distressed’) debt market. Currently, at least they are traded $ 600 billion in assets 'distressed', and "we hope that the number will increase".
BlackRock experts find opportunities in private markets, which are less active and less liquid, and "we expect they will offer exposure to accelerating structural trends." "We believe that diversifying through exposure to private markets – and within them – will be essential to structure resilient portfolios," they say.
In Spain, the last five years has been highlighted by large operations of venture capital funds, which have been purchased by companies such as Idealista (2015), MoreMobile o Telepizza (2016), Allfunds Bank, Pronovias or Cortefiel (2017), or Codorníu (2018), the latter year in which historical maximums were reached in investment activity, recalls Bain & Company. The takeover of Providence, KKR and Cinven Sobre MásMóvil is the great operation of the sector at the time of the coronavirus.
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