Mumbai: A run-up in the secondary markets has prompted a number of private equity (PE) funds to queue up to exit portfolio companies through initial public offerings (IPO) although, historically, the IPO market hasn’t provided the best exit route for investors.

Over the past decade (from 2005 till date), of the 1,401 firms that PE investors have exited, only 97 exits have come through the primary market, according to data sourced from PricewaterhouseCoopers’ (PwC) India unit.

The maximum number of primary market exits were seen in 2010 when 24 PE-backed firms launched IPOs, followed by 2005 and 2007, data shows. In many cases, PE funds only divested part of their holdings in such share sales.

“During 2005-2008, PEs managed to exit a lot of their investments through IPOs; post that there has been a lull in the markets and they started looking for other route for exits," said Girish Nadkarni, managing director, investment banking, at Motilal Oswal Investment Advisors Pvt. Ltd.

The poor track record of PE exits via the primary markets gains significance at a time when a number of PE-backed firms are planning IPOs.

Last year, 20 firms applied to the Securities and Exchange Board of India (Sebi) for an approval to sell shares. Of these, over three-fourths were PE-backed and many of them are still to open their public issues.

Since January, four IPOs have hit the capital markets. Ortel Communications Ltd, Adlabs Entertainment Ltd, NCML Industries Ltd and Inox Wind Ltd sold shares in IPOs. While the first three received tepid response from investors, Inox Wind successfully raised $164 million last week with the issue being subscribed 18 times. The IPO is the largest in nearly two years.

“There is a lot of pressure for PE funds to return capital to their LPs (limited partners, or investors) and now that markets are improving, the IPO window has opened for them. To conclude strategic or secondary sales, funds need to hunt for buyers and they do not necessarily give you the best valuation because you need to leave 2-3 times returns for the new investor when they exit after few years," said the director of a global PE fund looking to take one of its companies public. The person requested anonymity.

Since the beginning of this year, the BSE Sensex has gained 2.52%, on top of a 28.98% rise last year, while foreign institutional investors have bought $5.47 billion of stocks from local equity markets and $6.38 billion from bond markets.

Meanwhile, historical data shows that a higher proportion of exits have come through the public markets in the case of already listed firms and through the M&A (merger and acquisition) route for unlisted firms.

Around 585 PE firms exited their investments through M&As, management buyouts or secondary transactions over the last 10 years, according to the PwC data quoted above. In PE parlance, secondary deals are those in which an existing PE fund sells its stake to a peer.

In 2014, 65 deals were recorded where PE investors managed to sell their stake in private companies through strategic sale, secondaries and management buyouts. Since January, 14 funds have managed to exit their investments through this route.

“Even though capital markets have been buoyant since May last year, IPO is just one of the exit mechanisms and it does not guarantee successful exits, as a recent PE-backed company IPO suggests. It does, however, open other options, which were not available for a fairly long time," said Sanjeev Krishan, partner and leader of the private equity and transaction services practice at PwC.

The maximum number of exits appear to have come via the public markets, but this is in case of companies that were already listed rather than fresh issues.

According to the PwC data, 719 exits of the total 1,401 have come through the public markets over the 10-year period.

In 2014 alone, there were 104 public market exits worth $2.7 billion. In the largest block deal last year, global private equity fund Bain Capital sold a 4.27% stake in India’s largest motorbike company, Hero MotoCorp Ltd, and netted $400 million.

“Overall the market sentiment has improved...but if we compare ourselves with China, they have become very active with IPOs and our markets can yield much better," said Raja Lahiri, a partner at advisory firm Grant Thornton India Llp.

But people are still hopeful that the track record of primary market exits can improve if good quality companies approach the markets.

“Though this year there will be more IPOs, quality of companies and sustainable business models will be a key determinant of whether they will be successful," said Vikram Hosangady, head of transactions and restructuring at KPMG India