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    IPOs can wait. Most Indian firms prefer private lane

    Synopsis

    PE and VC investments in January-October 2018 had touched $25.2 billion.

    IPO-2---GettyGetty Images
    Between 2016 and 2018, only 15 companies, all with valuations below $250 million, took the IPO route to raise funds.
    Fewer Indian firms are raising money through initial public offerings (IPOs) as strong appetite for fast-growing businesses from venture capital and private equity firms has made them less dependent on the stressed primary market.

    Between 2016 and 2018, only 15 companies, all with valuations below $250 million, took the IPO route to raise funds, compared with 21 in the 2012-15 and 82 in the 2008-11 periods, according to data from the National Stock Exchange and Securities and Exchange Board of India.

    While IPOs were few, private market deals were many. Apparel brands Manyavar, W, Biba, AND, Fab India, condiment maker Veeba Foods, consumer goods firm Vini Cosmetics, pathology chain Metropolis and Five Star Finance were some of the companies that opted for private capital in recent years. “Companies are staying private longer as private capital is available and there is a higher threshold to go public on account of scale, stability and compliance,” said VT Bharadwaj, founder & partner at A91 Partners, a new mid-stage investment fund targeting consumer, healthcare and technology companies.

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    PE and VC investments in January-October 2018 had touched $25.2 billion, as per EY’s Private Equity Deal Tracker.

    Bharadwaj said the trend of companies preferring private deals over public is new in India as, before 2007, companies used to go public very early in their journey, at $100-million equity value.

    Now, most are looking for a valuation of at least $300 million before they go for the initial public sale.

    This may touch $500 million in the next five years, he added.

    FALL IN SMALL- AND MID-CAP STOCKS
    A crash in small- and mid-cap shares since early 2018 has dissuaded many companies from hitting the primary market to raise money. From its peak in January 2018, the mid-cap index has fallen 21% while the small-cap index dropped 31%. The mood in the stock market has a direct impact on demand for IPOs and valuations.

    “Valuations are in the middle of the cycle range and not at levels which attract a boom in equity raising,” said Ridham Desai, managing director and head of India Research at Morgan Stanley. “For smaller businesses, private capital makes more sense given the higher cost of catering to public markets, both in terms of disclosure levels as well as in terms of regulatory burden.”

    Desai said companies tend to raise money when equities are trading richly, because the cost of equity would be lower then. The phase between 2008 and 2011 — after the Lehman Brothers’ collapse — was not conducive for the stock market but many companies were forced to raise capital through IPOs, with lower valuations, because of lack of funding options. “The private capital market has exploded and has ten times the firepower it had ten years ago,” said Ajay Saraf, executive director, ICICI Securities.

    The gap in valuations for companies in the IPO market vis-à-vis the private market has also shrunk since then. “The valuation from an IPO was way higher than the private market, but now there is confidence in the private market to pay higher multiples because they are willing to hold them for a long period,” said Saraf.

    While the flow of private capital has come as a boon to many unlisted companies, lofty valuations will be a deterrent for firms which are exploring to go public. Companies like Vini Cosmetics, for instance, has toyed with the idea of a public float but has found a valuation mismatch for an IPO.

    Sandeep Singhal, MD at West-Bridge Capital, an investor in Star Health Insurance, Vini Cosmetics and Dr Lal Pathlabs, among others, said: “There is a lot more private money which is ready to be deployed but fewer companies are available. This has resulted in private valuations becoming steep; they aren’t cheap today.”

    WestBridge backs both publicly listed and privately held companies. This year, the US will see highly valued tech companies like ridehailing biggies Uber and Lyft, workplace messaging app Slack and online image search platform Pinterest go public. What has happened in the US is that companies going public now tend to be older than those which went for an IPO during the dotcom bubble.

    “Ultimately, all private equity money needs exit. If the public market mood darkens, it will have a ripple effect that goes all the way through the PE and VC ecosystems,” said Aswath Damodaran, professor of finance at the New York University Stern School of Business.



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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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