Where is the Risk Capital going?
By: Amit Bhushan Date: 6th May 2016
When the going gets tough, the tough goes into hiding; to save himself for a day, so that he can come back to fight back at a later stage. The adage applies to the Risk Capital as well. With most economies showing the signs of a slowdown, the investors with a risk appetite, seem to be on a vacation. The result seems to be a recalibration of the financial activity where risk taking was the primary driver. Prominently the highly visible merger and acquisitions and private placements of equity seem to be going down. Even an ultra-loose monetary policy which may allow otherwise stronger players to borrow and invest, has not really brought forth any major change to the risk perception of the players and their investment behaviour.In such a scenario, what may be in demand are projects on the back of government funding.
What comes next are Public Private Partnership projects where there is certain level of monopolistic competition and dearth of consumers and their readiness is not in doubt. What the private sector may be looking for is low Payback period projects, so that risk capital doesn't have to endure a long waiting period of uncertainty. The long gestation projects which may be subject to a higher uncertainty are being postponed i.e. if they are not being ruled out completely. The volatility in commodities and forex markets also may not be giving comfort to investors to take up several projects as returns may be unpredictable.Re-engineering processes basis digital tools and leveraging the power of technology falls in the last category.
Most of the established businesses are still not sure of the longevity of the digitized transaction environment especially in the emerging world and would rather like to wait and watch as to where the markets are actually moving. It is an increased number of start-up related activities which is visible in the emerging markets. Nimbler providers of various services have emerged from Retail to Education to Travel to Fintech have emerged some of whom may seek to revolutionize loans and payments amongst other services. They have only scratched the surface presently.The old economy businesses have mostly stayed away from the new trend concentrating on good old government contracts or projects on the back of government buying, PPP or other infrastructure projects where they could see some potentially sustainable advantage. The fall in Real Estate, Commodities and Wholesale prices had their own toll in the capacity of such enterprises to invest in new projects. The other part might be their own view about the digital being in with a bang so suddenly.
Some of the large old businesses might feel very insignificant impact of the digital technologies on themselves however it is the smaller businesses associated with them who may be reeling under an impact of customers' change of preference while ordering for goods or services where digitally savvy & connected agents may be able to score better. It is only when the digitally savvy distributors are able to change customers' preference towards another brand that these businesses and their upstream units may start to feel the heat.
The value hunt by the digitally charged service providers will need to go up by several notches for that. However the financial services are ones which may be losing out. This is because digitally savvy Fintech may be walking away with a host of their customers on the back of services. Like mobile based Taxi hailing services is support Wallet accounts for a clutch of better off clients. The same may be accentuated when Parking Lot operators start insisting on Wallet based payments. This may allow wallet industry to reach out the target audience to cross sell Insurance and bonds amongst other things which hitherto were chased by banks.
An increasing rate of digitization of such transactions may not only be a loss of deposit business but also open up financial sectors and banks to more competition. So are the traditional financial sector service providers ready for such competition, is a key question. And for how long can such deposits be afforded to be lost to Wallets and other service providers. Besides Financial services some impact may be there on information & entertainment services since the consumption habits and expectations of people may have been affected due to digitization and increased access of internet to masses.
We are also witness to increased digital shopping habits in tier 2 & 3 cities/towns. With increasing sophistication of supply chains in these towns. This is allowing a sudden spurt in consumption of some specific brands in such towns based on local preferences. While some of the "National brands" are able to find new markets, however it is also true that some of the Regional/Local brands are also able to communicate their value proposition to a wider audience and find new markets for themselves. This has allowed for an increased competition for consumers wallet share and is quite directly impacting the bottom lines.
While the activity level may yet have had an impact on sports goods, hospital & well-ness segments goods, gardening, Do-it-Yourself segment and other sundry sectors which may not be highly organized with large players, however this may soon catch the other sectors as well. The digitization of commerce helps to finely underline various players' competitive steak and allows them to capture markets basis the same. So the impact on smaller players may allow them to recast and make their operations more competitive with the bigger players feeling the impact later. The steady growth in penetration of digitization tells this story.
~ END ~