Dozens of private equity funds eye revival of Indian IPO market

Close to two dozen private equity (PE) firms are waiting for the Indian IPO market to revive, which will help them exit some of their investments.

Of the more than 50 firms that have received approval from the Securities and Exchange Board of India (Sebi) for their initial share sales, at least 17 are backed by around 23 PE investors, according to an analysis of documents filed with the regulator.

A revival in the IPO market will help these PE investors liquidate their shareholding in these firms.

So far this year, seven firms have raised a total of ₹5,033 crore through their respective IPOs, while last year 24 firms raised a total of ₹30,959 crore through IPO, according to data from primary market tracker Prime Database. Some of the investors that used the public market route to score big exits in 2018 included Kedaara Capital, Warburg Pincus, and Everstone Capital, which part exited from Aavas Financiers, Lemon Tree Hotels and IndoStar Capital Finance, respectively.

In the past few years, public markets have helped improve the exit performance of PE investors by providing them a route to sell their stake in addition to the traditionally used routes such as sale to strategic investors or other PE funds.

According to a recent report from consulting firm EY, PE firms have recorded exits worth around $1 billion in the last three years through IPOs, with the year 2017 witnessing $1.8 billion worth of exits.

Some of the PE funds that are eyeing exits through the IPO route include Advent International (ASK Investment Managers), TPG (Dodla Dairy) and CX Partners (Mrs. Bectors Food Specialities).

“Since 2015, public listings have emerged as an important exit route for PE firms in India. When the public market are doing well, they tend to offer you a better price than what private market investors like private equity or strategic investors would offer and that makes going public a good exit route for funds,” said an investment banker advising a PE fund on the IPO of its portfolio company. He requested anonymity.

Public market listings also have the advantage of improving one’s returns by participating in the upside that the stock might see post listing, he added.

“Most PE firms generally sell only a part of their stake in the IPO. So if the stock performs well after listing, they can get the benefit of that increase in price on the remaining shareholding, which improves their overall returns,” he said. According to another investment banker, Indian public markets have matured, which has made PE firms more comfortable with going the IPO route for exits. “Public market investors are more keen to invest in an IPO of a PE backed companies as they expect such companies to have a lower risk related to corporate governance. Also, the amount of liquidity that has flown into domestic institutional investors such as mutual funds has meant that there is a strong appetite for larger cheque sizes and thus the average size of the IPO has gone up significantly, which means that PE firms are able to sell a large chunk of shares through the IPO,” he said.

Some of the large PE exits witnessed in public offerings in the last few years include ChrysCapital’s ₹1,347 crore exit from Eris Lifesciences Ltd, Actis’s ₹910 crore exit from Endurance Technologies Ltd and IFC’s ₹810 crore exit from Bandhan Bank Ltd.