PE investors ride IPO boom, clock stellar returns by selling $2-bn shares

Private equity (PE) investors have made the most of the initial public offering (IPO) boom in the domestic market over the past two years. 
 

These early-stage investors have sold shares worth $2.1 billion by divesting their holdings through maiden offerings since 2017, data from Venture Intelligence shows. 

Interestingly, most of the PE investors have made mouth-watering returns on their investments in companies such as AU Small Finance Bank, Varroc Engineering, Bandhan Bank and Indian Energy Exchange (IEX).

Warburg Pincus, ChrysCapital and Lightspeed Ventures are some of the overseas investors who have liquidated their investments at attractive returns. 

Among the domestic private equity firms that have successfully used the IPO route to pare their stakes are Multiples PE, Kedaara Capital, Tata Opportunities and Aditya Birla PE.

The biggest PE exit through an IPO since 2017 has been in Varroc Engineering at $260 million. Tata Opportunities fund made a return of nearly six times in the auto components maker at the time of its IPO in June this year. 

In terms of returns, Lightspeed Ventures and Multiples PE made around 10x returns on their investment in IEX. Similarly, Singapore-based GIC and World Bank-backed IFC made nearly nine times on their investment in Bandhan Bank.

"It is a natural progression in the life cycle of a company, and a good business model needs money to scale up. A PE player comes in, and once the company achieves a certain scale, the natural step is to get a broader base of investors and take that story to the market. If you look back, the number of PEs investing in good businesses went up around 5-6 years ago, and it has reached a point where they have scaled up and are ready to go to markets," said Shilpa Kumar, chief executive and managing director of ICICI Securities.

The exit options for PE investors could be through an IPO, or by way of sale to another PE or strategic investor. 

Bankers have said that IPOs have generally been the preferred route over the last few years, given the superior market valuations in comparison to private exits.

While PE investors have made stellar returns in most cases, the post-listing performance of some of these companies has been disappointing. 

Shares of Varroc Engineering, for instance, have declined 31 per cent over their IPO price. 

The stock prices of other companies such as Aavas Financiers, Future Supply Chain, and TCNS Clothing are also currently marginally below their issue price.

 

However, deals such as AU Small Finance Bank and Bandhan Bank have seen good appreciation in their stock price post listing even.

"Some of the recent deals have been a win-win for both the PE as well as the IPO investors. It is a good sign that IPO investors have been comfortable investing in issues that were either pure OFS (offer for sale) or had a significant secondary component," said Salil Pitale, joint managing director and co-CEO of Axis Capital.

Market participants said one had to look at equity returns over extended periods to compare returns, but conceded that valuations of some PE-backed IPOs were on the higher side.

Every second IPO this year comprised an OFS by a PE investor. Last year, nearly two-thirds of the IPOs had a secondary share sale by PE players. Since 2017, 60 IPOs have mobilised $15 billion.

"The broader equity capital markets (ECM), over the past few years, have been reasonably buoyant (except for the recent volatility), and the valuations in public markets have been superior to those in the private markets. Therefore, the companies that had the scale and positioning to do conduct an initial public offering went down the listing route and delivered strong returns to the PE investors," said Nipun Goel, president and head of investment banking at IIFL.