Mumbai : Global investment banking bluechip Rothschild & Co. has been at the forefront of some of the largest cross-border mergers and acquisitions, restructuring and capital advisory deals in India. In an interview, Chandresh Ruparel, Managing Director and Head of India, laid out the key factors shaping dealmaking in the near future, amid a volatile external environment marked by geopolitical uncertainty, including the fear of recession. Edited excerpt:
How are current global uncertainties and rising interest rates affecting dealmaking activity?
Here the deal activity will be cautious and selective. Deals will continue to happen but volumes will come down due to a number of factors. Liquidity is no longer as abundant as it was some time ago, and although valuations have improved significantly, financing has become costly. So, we’ll probably see fewer but higher-value deals. If you look at the Indian dealmaking landscape, the days of outbound transactions are practically over, except in select pockets like IT services. The two major drivers of deal activity will be insolvency and bankruptcy regulations and restructuring spaces backed by the private equity ecosystem. However, if you look at private equity itself and how it is funded, you will see that most funds with great exits in the past raised funds through leverage. However, leverage will be cautious and costly and therefore, many funds will probably think twice before exiting committed funds. Also, investment committees of private equity investors will have more questions than ever before and transactions will be subject to more scrutiny than ever before, which may restrict transaction activity to some extent.
Do you think India is in a better position than its emerging market (EM) counterparts? Could India’s prospects of generating ‘alpha’ outweigh the wider risks with EM as a whole?
Not necessarily. I’m not being negative, but my impression is that as far as dealmaking is concerned, there was a lot going on. Investors were worried about missing out on opportunities, which added to the frenzy. However, the rush we have seen over the years has dwindled and many who had invested earlier are now reducing their investments and those who did not participate in the rush are now thanking their stars. Huh. Though India has outperformed the rest of the packs in terms of valuations, we have also gained a lot. As things stand, the focus has shifted from growth development to developing meaningful businesses. Therefore, overall, the use of money is far more directed than before. I trace this trend to what happened after the dotcom bust in the early 2000s, where we saw extended periods of moderation when it came to valuation and funding.
How long will this period of extreme caution last?
For the first time since the 2008 global financial crisis, we are seeing liquidity being sucked out of the financial system and it will not be without consequences. We will see at least two years of slow corporate growth. If you look at the revenue, it will probably register a growth as demand picks up after two years of Covid-led crunch. In addition, there have been structural changes in consumer behavior, which will lead to an increase in revenue. However, if one looks at the costs, it becomes clear that margin pressure will continue due to higher interest and input costs. On the demand side, it is heartening to see that the rural sector is standing its ground and increasing in demand.
Which sectors will see the most deal activity?
Technology firms may see further consolidation. Pharma and healthcare will see M&A activity. The new energy sector will require recurring investments. In the field of renewable energy, new technologies such as hydrogen and energy storage will see great interest.
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