Private equity investments in early-stage financing during COVID-19

Objective: This paper explores the trends of Private Equity (PE) investments and their financing strategies in early-stage financing during COVID-19. The questions asked are: How does a shock such as a global pandemic which led to a subsequent closure of every sector in every country affect the allocation of PE resources among portfolio start-ups? What are financing strategies of PE investors in such an environment? Research Design & Methods: This study uses data sourced from S&P Global with all direct and completed investments by PE investors / sponsors between 2020 and 2022. Research methods to test the hypotheses include data visualisation, and regression and mediation analysis. Findings: Data analysis indicates an initial muted performance in the first two quarters of 2020 in both number and volume of investments. The average investment was USD 3.48 million in 2020, to increased to USD 4.58 million in 2021, and increased again to USD 5.03 million in 2022, indicating increasing comfort among PE firms in investing within a changing environment. PE firms continued to invest in familiar regions including North America, Asia, and Europe, and showed selective participation through larger average investments in newer regions, such as the Caribbean. Seed financing was by far the largest financing stage both in terms of number (69% of sample) and volume (65% of sample) with pre-series B having largest average deal investments. Regression analysis revealed that foreign investments significantly influenced the relationship between offering type and deal size. While international offerings had a positive association with foreign investments, mediation analysis indicated that foreign capital ultimately decreased investment size. Implications & Recommendations: This study highlights the resilience of global PE investments and their adaptive investment strategies during the COVID-19 pandemic. The rapid rebound in deal activity suggests that PE firms preferred investing in mature ecosystems and established sectors to position themselves to preserve value. Selective larger investments in emerging regions, such as the Caribbean, suggest opportunities for value creation. The mediating role of foreign PE investment on offering types and deal sizes indicates PE preference for simpler and lower-risk transactions during periods of heighted uncertainty. Contribution & Value Added: First, this study enriches the literature PE financing and entrepreneurial activity. Second, it contributes to the growing literature on crises by examining the impact of COVID-19 on start-up financing. Third, this paper provides insights into strategic investing by PE firms during periods of heightened uncertainty. Finally, the examination of PE-investments in entrepreneurial activity adds to the study and practice of entrepreneurial finance by highlighting the role of foreign investments in deal making when faced with systemic risks and their strategies towards resilience and capital preservation.