Global Investment during COVID-19

Posted: January 4th, 2023

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Global Investment during COVID-19

The world today must battle coronavirus that is now a global pandemic. The outbreak is a humanitarian disaster with few precedents and is taking a toll on the lives and livelihoods of many people. “It is undisputable that the novel coronavirus will have a substantial effect on the society and the economy” (UNCTAD). The President of China, Xi Jinping, said during a televised address on February 23, 2020. Japanese Finance Minister, Taro Aso, expressed a similar view during the G20 meeting in Riyadh, Saudi Arabia, on February 24, 2020 (UNCTAD). Besides the worrying effects of the disease on human life, COVID-19 has the capacity to significantly lower not only the economy of one or few countries, but also the global economy (Wilson). The high communicable nature of the respiratory disease that has so far claimed more than 650,000 lives worldwide puts a threat on global business and trade, and forecasters think that global investment may take a twist if the harsh effects of the pandemic last several more months (UNCTAD). Already, many companies and investors fear that the pandemic will have far-reaching effects on their operations, and so far and escalating number of firms and economic sectors are under immense pressure. If even they were stable and properly capitalized before the outbreak, today is a different issue. COVID-19 has affected global investment, particularly private equity funding, but operators in the sector may apply some approaches to continue with their activities considering that the pandemic presents some window of opportunity. 

The entire global economy is attacked on numerous fronts through the full lockdowns of some of the leading economies in the world. For manufacturers, the direct and indirect disruptions due to COVID-19 have disrupted supply chains as the pandemic forces companies in most of the globe’s production centers to shut down, and place others, in less-affected places, into a dilemma due to the scarcity of the required inputs (International Economics Consulting). From a demand perception, while demand for essential goods such as health supplies, medical equipment, and food remain high, the overall demand has fallen as buyers are confined at home in an attempt to contain the spread of the virus and to flatten the curve (Tedder). The service sector is equally hit by the pandemic from the onset of the disaster. Sectors such as hospitality, travel, and tourism are worst hit, and the situation is not getting any better because of the escalating quarantines, loss of jobs, and restrictions (International Economics Consulting). Firms witness substantial inconveniencies because they have to delay or postpone new recruitments, and even in worst hit areas, implementing mass layoffs because of the reduced revenue and escalating debts (The World Bank). The unemployment claims in America alone by the end of March had reached a record high of 3.29 million, while the International Labor Organization projected that at least 213 million people would lose their jobs all over the world in the worst-case scenario (International Economics Consulting). Food insecurity is increasingly becoming a major concern with the virus fast spreading to various parts of the world (Wilson). Some supermarkets record empty shelves due to impeded transportation of production inputs such as animal feeds, veterinary medicines, fertilizers, and seedlings among others (International Economics Consulting). The logistics blockages has restricted reach to markets, and the producers of perishable items are now experiencing significant loss, and are afraid that the issue might not end soon. The effects of COVID-19 on global operations are far more reaching that one would expect.

Impact on Global Investment

The United Nations Conference on Trade and Development (UNCTAD) published the 2020 World Investment Report, which reveals that the pandemic has resulted in steep fall in investment flows, and puts developing countries at a higher risk of feeling the pinch. The World Investment Report discovers that lockdown regulations have derailed ongoing investment prospects and forced multinational companies to reconsider new projects (IISD). The report called International Production Beyond the Pandemic, predicts that global FDI (foreign direct investment) will drop up to 40% in 2020, bring the rate below $1 trillion for the initial time since 2005 (IISD). The report projects that FDI will drop to 5-10% in 2021 and start to recover at the beginning of 2022, followed by international value chains, refill of capital stock, revival of the international economy, and reformation for flexibility (IISD). The revelation by the World Investment Report echoes the statement by Njau that the emergence and fast spread of COVID-19 will adversely tamper with global FDI flows. Njau feels that with the transmission of the virus ranging from short-term steadiness to persistence throughout the year, the fading trend on FDI will be negative five percent to negative fifteen percent compared to the past predictions forecasting  marginal expansion in the foreign direct investment pattern for 2020-2021. Mukhisa Kituyi, the General Secretary for UNCTAD asserted that the outlook is highly unpredictable and relies on how long the misfortune will last, and on the appropriateness of the policies handling the economic effects of the health crisis (IISD). The Secretary General stressed that the changes underway in global investment will impact emerging economies over the coming decade and requires substantial policy overhaul.

The World Investment Report identifies Africa as one of the regions that is likely to be worst hit by the pandemic in terms of global investment. Projections indicate that the investment flows in Africa are expected to drop 25-45% in 2020 due to the effects of COVID-19 and reduced commodity prices, particularly for oil (IISD). The investments in manufacturing and service sectors, including tourism, leisure, hospitality, and aviation have dropped drastically, and analysts expect the trend to persist moving forward. The 2020 World Investment Report recognizes two possibilities that give hope for the picking up of investment flows in Africa, and urge leaders to focus on these areas to safeguard their economies from falling (IISD). One of these factors is engagement in global trade under the AfCFTA (African Continental Free Trade Area), an opportunity that could save the economies of many African countries (IISD). The second element is that leading global economies are acknowledging ties to the African continent and facilitating investment in industrial development and infrastructure (Chidede; IISD). African countries must take advantage of the possible opportunities to avoid witnessing irreplaceable damage due to decreased global investment.

The World Investment Report 2020 projects that investment flows in Latin America are likely to halve by the end of 2020. The health crisis has compounded social and political unrest and structural incapability, heightening foreign investment complications and fostering a deep recession (IISD). The escalating socioeconomic turmoil is projected to cause adverse implications on the transport, tourism, and commodities industries (Saldinger). Besides Latin American countries such as Peru, Chile, Brazil, and Columbia, which rely on foreign investments, particularly in the extractive firms, will feel the pinch of the reduced commodity and oil prices (IISD). Analysts predict that the Caribbean is anticipated to be the worst hit by the failure in tourism (IISD). Experts think that the region will be hit hard by the global reduction in demand, especially in trading activities with the Chinese and the Americans (IISD). The worst affected Latin American countries should restructure their policies to save the economy from collapsing due to reduced investment flows.

Experts do not expect the flow of investment to Asia to be any better. IISD indicates that investment flows to the region are predicted to fall by 45% in 2020. The factory stoppages and lockdown directives caused by the health crisis significantly affected supply chains and production, and these will have direct impact on rate of investment (IISD). In addition, the economic recession and reducing business earnings have caused many multinational corporations to push forward the investment plans in the region (IISD). The report by UNCTAD suggests that a drop in Chinese foreign investment and supply of intermediate inputs can tamper with the productive capability and the exports of any particular nation based on how reliant the various sectors are on Chinese investment and suppliers. For instance, some auto manufacturers in the European market may experience the shortage of vital components for their production activities because of the decreased investment from Chinese firms. Equally, firms in Japan may find it hard to acquire the necessary parts for their assembling operations due to the decreased investment from both the Japanese and the Chinese (UNCTAD). The effects on the pandemic on investment flows in Asia suggest that the problem requires long-lasting solutions to prevent future calamities.

The health crisis has affected the economic outlook of various countries. Some countries that recorded higher GDPs expect lower records this year while some expect to perform even worse next year. The chart below provides a summary of the economic overview for selected nations for the years 2019, 2020, and 2021;

Erken

Effects on Private Equity (PE) Funds

Scholars have paid considerable attention to the effects of the 2008-2009 global financial problems on the private equity sector and realized great effects of the economic turmoil on the private equity sector. In the absence of clear information, scholars are confident that the novel coronavirus will have considerable impact on returns, fund-raising, exists, and investments. The private equity industry according to MacArthur, Elton, and Rainey is already witnessing considerable reduction in international buyout and exit transactions. Chinyamutangira and Decandido argue that contributing to the reduction in activities in the PE sector are the restrictions that many sectors are experiencing, including restrictions on non-important travels and workers being advised to work from their homes as social distancing is a vital requirement to curb the disease. The restrictions on interactions will most likely interfere with most activities in many areas where the coming together of people has significant impact on revenue generation (Chinyamutangira and Decandido). Economic experts think that similar trends are likely to impact on returns and fund-raising as the year progresses. Nonetheless, the PE sector started to experience a downward trend in 2019 due to slowing economic growth and trade wars. PE deals increased from 4,725 in 2017 to 5,180 in 2018 but fell sharply to 2,142 in 2019. Analysts predict that 2020 and the next few years may record lower PE deals. The chart below provides an overview of PE deals before COVID-19 affected most nations;

Linley

PE firms, like all other organizations, have been working hard on all areas; safeguarding the safety of workers and consumers, and helping portfolio firms so that they can stay afloat at this time of crisis. Now that the first few months of the pandemic are over, firms are switching their focus to other obstacles (Cumming). For the many sponsors and founders in the PE sector considering a sale in 2020 that implies dealing with several major concerns the health crisis has yielded seemingly over a short period. One of these concerns is significant obstructions to deal or contract execution (Green). For instance, it is now hard to carry out diligence face-to-face conversations, or to visit production sites. Also, the increasing costs of financing deals add to the considerable barriers that already exist to deal execution. The other challenge PE firms have to deal with now is the sudden shift in valuations. Green argues that valuations have fallen for the most part of the pandemic because organizational performance at a time when demand is falling is unpredictable and public equity becomes volatile. PE companies must now deal with the business, health, and humanitarian interruptions that have increasingly become overwhelming as the numbers of confirmed COVID-19 cases continue to escalate all over the world (Green). The disruptions affect a significant portion of management time, and divert their attention to curbing spread within and outside the company. In addition, many PE firms and their beneficiaries have identified new obstacles in many aspects of their operations. Some of the PE firms that appeared appealing before the pandemic struck are now less attracting to purchasers. Many organizations have suffered an economic downturn from the coronavirus-induced recession, and some such as service providers that deemed their activities as being crucial have learned that many purchasers regard their offerings as secondary.

It is apparent that the number of international buyouts transactions has dropped by 60% from January when the virus started to spread to other countries to April when many nations were already affected. The disease seems to alter the market forces because now general partners mostly focus on stabilizing their portfolios, while retailers are reluctant to unload their firms amid the volatility (MacArthur, Elton, and Rainey). Lenders too, are caught between the rock and a hard place because they now pay attention to how borrowers would serve existing loans, while trying to develop suitable approaches to evaluate risks amid the intense macroeconomic challenge (OECD). Although most financial institutions are not freezing their operations as it happened during the last economic downturn, lending has dropped 80% even before the year comes to an end (MacArthur, Elton, and Rainey). The coronavirus is set to have far-reaching effects on private equity than anticipated because no one really knows how the pandemic will affect the private equity sector.  

Fund-Raising

Fund-raising has immense impact on global investment, and the activities in this area fall under the private equity industry. MacArthur, Elton, and Rainey write that through April, the totals from fund-raising have not been very bad because all over the world funds of all forms generated at least $286 billion over the first four months alone. Considering the amount on a yearly basis, the amount would be more than $860 billion by the time 2020 comes to an end, which is not a huge difference from the generations in the past years (MacArthur, Elton, and Rainey). Nonetheless, MacArthur, Elton, and Rainey think that what happens now is a bit of a fantasy. The scholars feel that most of the money generated during the first four months only reflects the efforts put in place before the virus spread to other parts of the world. Some predictors already feel that limited partners will undoubtedly cut the amount of capital they would invest with private equity funds over the remaining months of 2020 (MacArthur, Elton, and Rainey). Campbell Lutyens surveyed a number of limited partners and discovered that only about one-third of the respondents would proceed with their businesses as usual when releasing funds or engaging in new financial commitment (MacArthur, Elton, and Rainey). The rest of the limited partners are putting their operations or commitments on halt, going on only with past transactions but not establishing new relationships. The main reason for the reluctance of the LPs (limited partners) revolves around structural factors. For example, the denominator effect, which twists the size of various asset clusters in the portfolio that LPs manage when the markets are largely unpredictable. The Institutional Limited Partners Association surveyed several LPs at the beginning of April and at least 10% of the respondents were largely worried that the denominator effect would push them over the targets they have placed on private equity, restricting new distribution (MacArthur, Elton, and Rainey). The data suggests that fund-raising appears to be doing well on a yearly basis, but closings to today indicate pre-coronavirus activities and totals are expected to drip as the year proceeds.

Returns

 The effects of the disease on PE funds are likely to have some considerable impact on the returns. Returns so far are recording a downward trend because market-to-market computations do not take place immediately. The survey by Campbell Lutyens showed most of the general partners and limited partners hope to witness write-downs of not less than 15% in the evaluation of the funds in the first-quarter (MacArthur, Elton, and Rainey). Funds usually try to eradicate the unwelcoming news as fast as possible, so they consider write-downs in large volume. However, it is not easy to value firms in such uncertain environment, taking into account the interference to organizational cash flows, inadequate comparable businesses, and market volatility (MacArthur, Elton, and Rainey). Evaluators think that the trend emanating from the downturn is not very clear. They realize that the deals struck before the economic downturn appear to do less well compared to those developed during and after the economic fall.

Exits

The rate of exit transactions has dropped nearly by 72% since the beginning of the year. Presently, funds are waiting for better times before selling anything that they do not have to give out. Actually, nearly 80% of general partners interviewed by Investec in a recent study showed that they did not expect to exit any portfolio firm over the next one year (MacArthur, Elton, and Rainey). Nevertheless, the condition could change all over sudden, especially if the market conditions become well. Unlike in the preceding downturns, when most of the firms in private equity portfolios had just been purchased, today more general partners are reducing their frequency of making deals and are holding on their assets that they would otherwise sell if the market conditions were normal (Green). They would not exit id the prices are not right, but the aging assets will potentially hasten operations once normal operations resume.

The pandemic is set to have other far-reaching effects on PE funds, which requires portfolio owners to be keen with how they handle their operations, especially when managing large portfolios. The findings by Morgan Stanley indicate that the pandemic creates a scenario where there is no guarantee that a portfolio will realize its investment goals. A major factor for the failure is that portfolios are susceptible to market risks, which is the likelihood that the market prices of securities owned by the group will fall and may be less than their acquisition rate. The reducing PE funds available to companies due to the health crisis expose portfolios more risks that would push global investors even farther. For example, the fixed income securities that are part of organizational operations are threatened now more than ever by the capability of an insurer to make interest payments in time, alterations in interest rates, overall market liquidity, and the insurer’s creditworthiness (Morgan Stanley). Organizations face more threats because in an escalating interest-rate setting, the values of bonds go down and may lengthen how volatility lasts (Morgan Stanley). The falling PE funds available to organizations following the outbreak of coronavirus put portfolios at substantial threat of reducing in capacity.

Possible Hope with PE Funds

Some scholars think that properly using PE funds will help many businesses to overcome the harsh effects of coronavirus. A report by Deloitte informs that the effects of the virus form a perfect scenario where PE can serve a vital role. The report informs that those with the highest predictions may not have been sold prior to the pandemic, but now they may provide alternative sources of funding. Deloitte thinks that PE can offer capital; potentially preventing loss of jobs, reorganizing debts, and assisting business leaders lead their firms through the next few coming months. The document by Deloitte informs that in the initial few weeks of dealing with the health crisis, perhaps it was not possible to see the results, but some of the influential PE companies are already seeing how to arrive there. What is more, they leading PE firms are sitting on about $1.6 trillion of dry powerder to help their prevailing portfolio stand, mostly investing in firms that are currently battling closure, assisting transform businesses and entire sector, and pursue other development and value-adding approaches.

Sizing up the Chances and Challenges

PE firms must understand that capitalizing on the slim chances during the pandemic requires substantial care and effort to achieve impressive outcome. It is apparent that the near-term projection is obstructed by several impediments, which requires operators in the sector to consider effective ways of achieving the set goals and objectives (Deloitte). Some investors are already weary of the prevailing lockups needed by PE, while most of the funds that were continuing with generating capital may not achieve their individual targets. The current situation requires investors to maintain particular measures in their general portfolio and with the equities much depressed, some PE investors may have to lower their exposure to PE activities.

Deloitte thinks that PE companies can deal with these hurdles, which are not necessarily walls. The document by Deloitte informs that much relies on the specific PE fund because a fund that finished its rounds of funding by the fall of last year and is yet to release much of the capital may be in a good position, but if a fund is set to commence fundraising at this moment, it is harder to become successful. The worst affected are the funds that were strategizing to exit their portfolio firms through IPOs (initial public offers) in the coming years because the volatility of the financial markets developing an exit plan is not very easy.

Achieving considerable success with PE during this time requires the companies in the sector to elevate their operational capabilities to overcome the hurdles that many other companies face at this time. Deloitte informs that funds will have to multitask to achieve desirable outcome. Some companies are already forming committed teams to facilitate the realization of specific goals and objectives (Gottfried). For instance, while one team pays attention to assisting their portfolio firms through the crisis, another group might form debt-financing plans, including the assessment of SMEs bailout offers, for their portfolio firms. Also, another group may pay attention to reestablishing interactions with dealers who cut links as valuations increased, while another team may focus on sharing information of important strategies and other content with fund investors such as insurance organizations and pension funds. The research by Deloitte affirms that not all funds have the ability to execute all these initiatives, and several others may lack the in-house capacity to predict special matters. Such concerns may include taxes, both the assessment of intricate tax savings and refund chances formed by the CARES (Coronavirus Aid Relief, and Economic Security) Act enacted by the U.S. Congress in 2020 and the possible tax repercussions of different debt-financing approaches (Deloitte). Such methodologies, which usually rotate around a portfolio organization adjusting terms of its debts with financers, or a PE company purchasing underestimated debt of a portfolio firm – may only be logical on paper, but have the potential to trigger substantial tax effects later if not adequately developed.

Private equity companies are likely to overcome the challenge through proper planning and organization because this is not the first time PE companies are witnessing such a challenge – even if the current issue is more disturbing. During the past major economic calamity – the 2007-2008 global financial recession – many organizations and their investors ratcheted back so fast and remained on the sidelines for a long time (Deloitte). The move meant that the funds would not be available when things looked so bad. Companies have not forgotten the lessons acquired in the past. Executives from the private equity sector have asserted these types of returns ought to be utilized. The report by Deloitte shows that so long as the company has dry and understands how to source contracts, it may benefit from the numerous chances ahead. Companies should be optimistic that several opportunities to making deals are open in the coming months, besides taking expansion equity positions (Flynn). Some public firms may be compelled to become private, while some may be able to proceed to make little cash infusion in public equities (Deloitte). Alternatively, others would consider relieving non-essential assets. The information encourages businesses that already feel the pinch of COVID-19 should not despair because many strategic finance opportunities are likely to avail themselves.

PE companies should begin by projecting the most possible impact possibilities to navigate the unpredictable nature of COVID-19. Organizations can create a rapid risk evaluation for every portfolio firms in light of the transforming scenarios. The most important thing according to Lino et al. is to identify the most disturbing issue first, permitting the company to direct its constrained resources and time towards the organizations with the most disturbing concerns first. Creating the model is a vital part of evaluating portfolio company risk.

The possible chances of developing investment during the pandemic do not imply that those companies that are swift in their operations will emerge to be the best. Many funds are still not putting their capital to work right away (Deloitte). The funds still require more information about the potential impact of coronavirus and progress toward containing the spread. Funds are still cautious because they fear that this might only be the initial wave of economic challenge from the reaction to the to the pandemic; as those effects permeate through the economy, private equity companies may be compelled to first carry out triage on their portfolio firms (Deloitte). The essence to readjust relationships, restructure conversations, and re-evaluating deals that appeared costly only a few months ago may be essential. Consequently, the rate of mergers and acquisitions (M&As) will not increase due to the effects of the pandemic (Deloitte). The companies seeking to spend their dry powder in such an environment should take time and select their targets very well. Furthermore, considering the relative nonexistence of rivalry from other investors, the relaxing firms can afford to restrain their operations.

Some organizations may consider other factors for slowing their activities at this time that COVID-19 is taking a toll on global investment. Some portfolio firms and some subsectors at large may have to reconsider their entire operations considering the systematic repercussions of COVID-19 on economic activities (Deloitte). For example, some firms or subsectors may have to shut down some major events, move a considerable segment of the global workforce to working from remote areas, and altering substantial portions of communication to virtual environments (Deloitte). However, each of these aspects represents suitable new chances for change, even when the virus is ultimately managed. 

Conclusion

The study shows how COVID-19 affects global investment, with the private equity sector being among the worst hit areas. The research illustrates how the pandemic has stalled investment flows in various parts of the world, including Asia, Africa, and Latin America that recorded high rates of FDI before the global health crisis struck. The lockdowns and other restrictions various nations have put in place to combat the spread on the virus seem to have a negative impact on capital investment and the givers of PE funds are restraining their activities for fear of losing much of their investment. Already, the number of exit transactions has fallen considerably, while fund raising activities are slowly depreciating. Nonetheless, some economic experts feel that the novel coronavirus presents a window of opportunity for operators in the sector, who may reach out to companies that require urgent aid to overcome the distress the pandemic has caused. The study shows that PE firms must know that capitalizing on the scarce opportunities during the health crisis requires considerable attention to get satisfying results. PE firms should be confident they will overcome the catastrophe, but will achieve better outcome through appropriate planning and organization, bearing in mind that companies have handled emergencies in the past. Despite the possible chances of penetrating the market with the pandemic taking a heavy toll on many economies each day, some PE firms are still restraining their operations because they must learn many things first before resuming all their activities. The war might be tough, but with proper restructuring of the existing policies, global investment will recover and yield good results to operators in various sectors.

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