PEs explore exits via secondary sales amid hurdles in IPO route

The challenges that the initial public offering (IPO) market faces are prompting private equity (PE) firms to opt for exits either through secondary stake sales to another PE fund or through a strategic investor, said industry experts.

“If the market slowdown continues for another six to nine months and does not normalize by March, these PE investors might start considering other exit options more actively,” said Subhrajit Roy, executive director and head, equity capital market origination, Kotak Investment Banking.

A lot of PE investors who were planning their exits via the IPO route over the next 12 to 18 months are still holding on to their plans as they expect the markets to normalize in the near-term, said Roy.

“That is why it is critical that the IPOs, in which PE funds are looking to sell stakes, get a good response when they hit the market in the next one and a half months. If they do well, the IPO route will remain as relevant for exits as it was in the past,” he said.

So far this year, only eight companies have gone public to raise around ₹5,509 crore. In comparison, last year saw 24 IPOs worth ₹30,959 crore, according to data from primary market tracker Prime Database.

Investors that used the public market route to score big exits in 2018 included Kedaara Capital Investment Managers Ltd, Warburg Pincus Llc, and Everstone Capital, which part exited from Aavas Financiers LTd, Lemon Tree Hotels, and IndoStar Capital Finance Ltd, respectively.

“There were hopes that it (the IPO market) will open up after the elections, but that did not happen because of the liquidity crunch in the market,” said Sanjeev Krishan, partner and leader, private equity and deals leader, PwC India.

“More than 20 PE funds were looking to monetize their investments through IPOs this year. So, if these IPOs do not come through, which is quite likely, then the PE firms will have to look at alternative exit mechanisms,” he said.

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

Exit through the IPO route has been the least preferred in 2019 by PE firms, with just four companies selling equity worth $69 million between January and June, according to data from EY India. That is 10 times lower than the IPO exits worth $760 million across 11 companies in the previous calendar year. The number for secondary sales, however, was significantly higher at $836 million across 17 deals and $1,455 million exits via strategic stake sale involving 32 deals, for the January-June period this year.

So far, IPO exits for PE funds are at their lowest since 2015, according to EY.

Public listings had emerged as an important exit route for PE firms in India with exits worth $3.6 billion between 2015 and 2018, 12 times higher than the exits in the preceding four years. The highest exits via the IPO route at $1.8 billion were in 2017.

“When the markets are down, the valuations are cheaper and investors prefer to wait,” said Ajay Garg, managing director, Equirus Capital Pvt. Ltd.

“In the present market, investors are waiting rather than trying to push for their transaction. However, if the market situation doesn’t improve beyond a point, then they will have to try alternative routes for exiting their investments,” he said.