Impact of COVID-19 on Investment Banking

Corona Virus has been the worst thing seen by the global economy since the 2008 crisis or as said by various experts it can even be worse than the 90’s Asian recession or the recession of the great depression in the USA. 

Investment Banking leads the way in the impact it has had over other sectors. Due to the huge impact on the economy of each & every country. No company wants to do anything right now. All the firms & investors just wish to let the storm pass & then get the collect the rumbles to get back on their feet.  The global indices have gone for a toss, multiple stock markets had stopped trading post hitting the circuit breaker at times multiples times a day. It was so bad that the global economy as a whole has lost more than $5 trillion. No company wants to release its IPO when the investment sentiment is so bearish. The markets have been pushed back a decade, there’s been a roller coaster ride for the global economy, however, it has been mostly down-hill with some stabilization around march end when almost all the central banks have put in liquidity relief & capital infusion packages for their respective countries. Asset managers are rewriting their ways to locate deals, manage their portfolio companies, and engage with promoters of potential targets. Top private equity firms had shut offices around a week or so before the country officially did and key executives and principals are now operating through telephone calls and zoom enabled video calls. Deals that were past the stage of due diligence are still being transacted through early-stage ones that have halted. Cash preservation is the main focus for the next three months and protecting cost structures for portfolio firms, given the tight liquidity and risk aversion banks have. 

The top Management is asked to take pay cuts so that the people at the bottom don’t face any monetary issues. There will be a reduction in fees for the fees for M&A, IPO & Fundraising. The fee pool in M&A so far this year is already down 37% globally. Given the present situation, it is not easy to close a deal, one needs to be in the same room to close a deal & make the stakeholders understand the need of the thing you’re pitching for or selling.

The outbreak had hindered the progress of certain facets of the PE business with specific regard to doing diligence and having outreach meetings with portfolio companies and the management of target firms. The combination of substantial dry powder and highly leveraged promoters in the system may be a once in a decade shopping opportunity for those players who can move fast enough to close a deal. There are many opportunities in sectors such as financial services, FMCG & healthcare with robust businesses that can withstand economic and social uncertainties over the long term. Large companies going through the grind, as their promoters struggle with liquidity because they are levered up at the holding company level and are starting to get margin calls thanks to the crashes in the stock market, and in the next six months, the targets that will come up for PE companies will make for a harvest season like never before. In several businesses, there’ll be a need to raise fresh equity if they are to get fresh credit, which means PE infusions are going to be unavoidable. The current disruption would also ensure that only fit companies would be around. 

However, the point is once this pandemic recedes, notwithstanding the projected knockdown of India’s real GDP growth rate, investors will find ample opportunities. Overall the volume of deals has reduced or temporarily stopped but the scrutiny for finding new targets hasn’t stopped. Every Investment banker just needs to utilize this time to do extensive research regarding each & every sector & then use this research to their advantage once this storm passes and poach every potential client with solutions for their best growth & expansion. 

Thank you.

Regards,

Milind Sharma,

Kautilya,

IBS Mumbai