PE-backed IPO pipeline intact despite setbacks

Lukewarm response to Ortel Communications and Adlabs Imagica reflects individual concern rather than a larger trend

Private equity (PE) firms have not lost hope for large exits through the initial public offering (IPO) route this year, despite poor response to the IPOs of Ortel Communications and Adlabs Imagica.

Odisha-based Ortel, backed by New Silk Route, failed to make a desired exit when the Rs 240-crore IPO of the cable and internet service provider failed to garner full subscription. ICICI Venture and Jacob Ballas also had a tough time when theme park operator Adlabs Imagica had to cut the issue price band when its IPO failed to garner enough bids. While these two PE-backed IPOs got lukewarm response in the market, the IPO of Inox Wind, which does not have any PE backing, did really well with 18 times subscription.

"It would not be fair to assess the success or failure of an IPO in the background of whether it is backed by a PE or not. The success or failure tells a larger trend of the market and pricing strategy taken by the individual companies," says Satyen Shah, executive vice-president (investment banking) at Edelweiss Financial Services.

In the past four years, when the capital markets were not buoyant, promoters looked for investments from PE firms. Citigroup Global Markets expects 2015 to have 30-35 good quality IPOs, worth $5 billion (Rs 31,500 crore), translating into $25 billion (Rs 1.5 lakh crore) worth of value in the marketplace. Citi expects 90 per cent of this IPO pipeline to be led by PE-backed growth companies, as the current market provides these investors viable exit opportunities.

This is a big leap from the Rs 329 crore raised through six IPOs in 2014, in which two PE-backed companies saw their investors monetise their stakes. The IPO market had previously seen buoyancy in 2010 when 64 companies raised Rs 37,534 crore, though only 12 PE-backed entities had seen their investors monetising their holdings, according to information provided by Prime Database.

Avalon Consulting, which tracks PEs, says Rs 1.8 lakh crore of PE investments were made in Indian companies between 2010 and 2013. Of this, Rs 1 lakh crore hasn't exited.

"Our IPO clients continue to be on course to do an IPO. I have not seen any change to their listing strategy," says V Jayasankar, senior executive director and head of equity capital markets at Kotak Investment Banking. "Sometimes, PE investors have a time horizon within which they have to wind up a particular fund or sometimes they need to show performance before another fund raise. In such situations, they may choose to do a trade with another PE investor, which might be faster than the listing process. However, such exits happen more on the margin."

According to the Securities and Exchange Board of India website, about 20 companies have filed draft red herring prospectus this year. Of these, about 15 are PE-backed.

With more in the pipeline, this could easily meet the investment bankers' estimate of a record number of PE-backed IPOs this year.