PE firms, promoters go for block deals as markets scale new peaks

Share sales in listed companies have gathered momentum with the markets hitting fresh record highs. This month, so far, transactions worth Rs. 26,152 crore have already been executed via block deals. Investment bankers said more such deals are in the offing.
 

Strong inflows from foreign portfolio investors (FPIs) and encouraging valuations are underpinning the deal momentum. Some of the large block deals in June are Canada Pension Plan Investment Board’s (CPPIB) 1.66 per cent stake sale in Kotak Mahindra Bank for Rs. 6,124 crore, UK-based investment firm abrdn’s share sale in HDFC Asset Management Company and HDFC Life Insurance Company (for a total of Rs. 6,148 crore), and US-based private equity TPG Capital’s divestment worth Rs. 1,390 crore in Shriram Finance.

“Resurgence in FPI flows, continued flows into domestic funds (especially small- and mid-cap funds), and sustained valuations are the prime drivers,” said Subhrajit Roy, MD & head, global capital markets, BofA Securities, one of the leading investment banks this year. “The block market in India has been quite resilient through the various market cycles over the past few years, and we expect this trend to continue,” he added.

Block deals activity took a beating in April as the markets came off nearly 10 per cent from their highs. However, with the markets once again regaining their mojo, private equity firms and promoters have been able to cash out.
 

Last week, the benchmark Nifty and Sensex surpassed their lifetime closing highs made on December 1, 2022. The broader market mid- and small-cap indices hit fresh highs earlier and have outperformed the benchmark indices this year. According to experts, a vibrant block deal market is a sign of deepening capital markets.
 

“Over the past decade, private equity players have placed good faith and billions of dollars every year in Indian firms. Many of these block deals are driven by the need for PE firms to exit. Their capital needs to be recycled and they must fulfil that mandate,” said Ajay Garg, founder, Equirus Capital.

Industry players said the up-move in the markets has turned valuations attractive. This is helping PE investors generate good returns on their investments. The price-to-earnings ratio of the Nifty Smallcap 100 has gone up to 21x, from 17x at the end of March 2023, owing to a rally in small-cap stocks, while that of the Nifty has risen to 23x, and the Nifty Midcap 100 index to 24x.

“The block deal momentum will continue for some time as the appetite and liquidity are strong. Some private equity investors have redemption pressure; they want to exit their investments or want liquidity from their older investments,” said Pranjal Srivastava, partner-ECM, Centrum Capital.

Interestingly, while block deal activity has been strong, the initial public offering (IPO) market has witnessed a slump during the first half of the calendar year. Funds raised through IPOs this year, so far, are down 83 per cent to $0.9 billion, according to Refinitiv data.

Going ahead, experts said, there could be a positive rub-off on IPOs.

“As investors participate in more overnight deals with a good aftermarket, we expect them to become more constructive towards longer-dated transactions like IPOs. We believe this momentum creates a good backdrop for IPOs,” said Roy.