Russian conflict may be a prolonged affair: Rajeev Misra, CEO, Soft Bank Vision Fund

As world markets grapple with the European crisis, questions circling around survival and longevity have arisen...

As events on the global front unfolded, with crude touching a rate of around $118 per barrel due to the onset of the war, there were various concerns about a liquidity crunch akin to that experienced in 2008 or even during the pandemic. At the seventh edition of The Economic Times Global Business Summit 2022, Rajeev Misra, CEO, Softbank Vision Fund, offered us an in-depth examination of the current and future changes that we may expect in the financial markets, while giving us an overview of liquidity issues, initial public offerings and in general, the global financial outlook.

“The financial system is in good shape. There are enough savings. And current account deposits in the US are at record highs. Individuals have enough savings. Unemployment is at a record low. House prices are high, which is the biggest asset in Europe and US that individuals have,” says Rajeev.

Misra believes that the crisis in Russia will last for a long time, and that the US markets will be shaken by high inflation. As 25% of wheat originates from Ukraine and Russia, it will have a huge impact on oil and wheat prices. He believes the US sanctions will be in place for a long period, perhaps prolonging the problem. “The Fed might go a bit easier on rate hikes because of that. So that’s positive, the rate hikes will have to happen because inflation is going to be. But there’s enough liquidity in the system.

Rajeev went on to say that cash-flowing businesses and the like are not suffering. “Even though many growth stocks are down 40% to 45 percent, the indices are not that much lower. According to some estimates, 75% of IT IPOs in 2021 were priced below the IPO price. When it comes to the Russian situation, I believe it will be a protracted process. This, I believe, will come at a price. The west will pay for higher inflation. Ukraine and Russia produce around a quarter of the world’s wheat.

In addition, there are numerous issues in Latin America, including oil inflation, food inflation, and European exports to Russia. And because the west is agitated and the US would not back down, this would be a long-term issue. In that instance, the consequences will be severe and continue for a long time. This isn’t going away, which is a problem because it contributes to inflation. But, I believe, the west has opted to put inflation ahead of aggressiveness and exclude Russia from the Western Parliament, which is not encouraging.” are Misra’s concerns.

Rajeev restated that the Fed may take a more cautious approach to rate hikes. As a result, rate hikes will be necessary since inflation will continue to rise. However, there is sufficient liquidity in the system.

Global liquidity issues

As global liquidity issues come under closer scrutiny, Rajeev vehemently stated that the landscape for the next six, or nine months would drastically change. Liquidity issues seem to impact a greater degree, with companies either seeking private financing or looking to exit via a public listing.

“I think number one, private financing will be limited. So if the company is raising a very early stage of 500 million, you have to write 20 million dollar checks. If the company is trying to raise 250 to 300 million or 500 million, they’re struggling. They’re struggling to find a lead investor who will come in with a large amount of investment.”

The landscape has particularly evolved in the last few weeks, and according to Rajeev, the private market has witnessed certain investors back out even after verbal commitments. He stressed that the private markets are the easiest in terms of raising a lot of money, there is reluctance unless the valuation and number two, the power of capital is shifted back to the capital provider. “Last year, it was important to secure the right investments, and people had to send multiple choices of investors sending them term sheets in one week and without detailed due diligence and so on and so forth. But they decided the price and valuation that has changed, and the power has come back to the capital provider.”

Rajeev continued that based on an examination of our 300+ companies, he divided them into three groups. At first, companies with capital on their balance sheet for more than two years appear to be alright. Second, to keep the company afloat for more than a year. Finally, companies with a runway of less than a year are included in the bucket, which means they must raise funds within the next twelve months, or within the next six months. And with that bucket, we are attempting to reduce costs and attract funds at any valuation. “Negotiations with our portfolio firms are still ongoing. Whatever the market can bear in terms of valuation, it will be included in the third category to ensure that you have enough capital. Because, as a result of what happened last year, many companies did not raise a large amount of money in the expectation that their valuation would rise. Take, for example, our $83 billion investment in 83 companies in 2019, which had an average ticket value of a billion dollars. We put $51 million into 220 companies, each worth $150 million. And we went with the premise that a year later, you may raise a bigger valuation.”

As a result, just a little amount of capital was raised for the long term, according to Rajeev. This means the IPO route is the last resort for obtaining funds and is becoming increasingly picky.

Markets to raise capital

There is just one main marketplace for raising finance around the globe, and that is the United States, Rajeev stated emphatically. “It’s not the United Kingdom, Frankfurt. It’s the United States of America. And, as I previously stated, 75% of tech IPOs are priced lower than last year’s IPO price. This isn’t to say that IPOs are no longer possible, but they are becoming increasingly difficult. As a result, the source of capital is also a concern. Companies should account for the reality that IPOs will be delayed, which has repercussions for ESOPs and employee morale. Employees want to see liquidity, and they’ve been told that the company will go public at some point, and they’ll be able to withdraw funds.”

Deploying funds in India

After having deployed about 2 billion in India, there had been plans to commit almost five to 10 billion in 2022. To which, Rajeev added that they had enough liquidity. “In India, our crew is putting in long hours. However, if you were in my shoes, you would do something similar someplace. You’d take a seat and wait for the market to rationalise valuations and uncover new opportunities. If you read Warren Buffett’s newsletter at the age of 92, you’ll notice that he’s not in a hurry to deploy capital. He has $110billion in his bank account. We’re on the verge of defaulting on a loan.

We’ve slowed down not because we’ve turned down investments, but because we can’t find enough of them at the right price all around the world.”

The market, according to him, is still not in a condition of equilibrium, with private markets valuing themselves at the same level as public market multiples.

Corrections in the market

In light of several Indian companies like Zomato and Paytm listing, yet not matching up to expectations, Rajeev shared his opinions on the pricing of these IPOs and the reception that companies such as these will receive going forward.

According to Rajeev, there may be challenges with one or two IPOs obtaining this price that aren’t tech IPOs, which will be a significant part of the Indian stock market in the west, because that is the new economy, and there will be some amazing firms that come through that are profitable, like delivery and others in India.

On being quizzed on Indian IPOs like Zomato and their performance. “The IPO went off without a hitch. After the IPO, it nearly doubled in value. Last year, the books were so full that there was a scarcity of growth tech startups in India. So you’re witnessing some of the first’s early impacts. For the past ten years, India has not had a single technology IPO. There was no exit. And then four or five companies suddenly go out of business. Books are 40 times oversubscribed, and so forth. Never seen in two weeks after IP or the stock doubles, something went wrong and it undervalued the company or the demand was so high, and investors have learned that it takes time to make money. It’s not going to double in the next six months. It takes four years to double the amount of money you have.

Rajeev remarked unequivocally that companies like Tata Mahindra or Reliance do not need to invest money in client acquisition because their customers are spread across all of their platforms. He went into more detail. It will come down to two factors, including the management’s independence and alignment. “Management has limited independence, will become enmeshed in the organization’s bureaucracy, and will be unable to make quick choices A committee-based, employee-run organisation is considerably different from a founder-led organisation. Very different from a company controlled by employees.”

 

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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