Domestic mutual funds “should form a cartel” and ensure that companies do not get away with pricing their initial public offerings (IPOs) absurdly high, hedge fund manager and founder of Helios Capital Samir Arora said in an interview to Moneycontrol.
Mutual Funds have failed to bargain with companies going public and thus to ensure there is money left on the table when the issue hit public markets, he said.
“They should form a cartel or something (and ensure that companies do not get away with pricing IPOs at ridiculous levels),” he said.
Arora even called on big institutional players such as HDFC Mutual Fund to boycott IPOs if the issues were not correctly priced.
Companies going public usually do roadshows ahead of the offer and meet top institutional investors, including mutual-fund houses, to build a case for investment and also take feedback on pricing.
Instead of the companies trying to win over the fund houses with better pricing, the fund houses have been queuing up for share allotment, ending up with a poor deal, he said.
“Public market people have been totally useless in bargaining with the private market people. Our big fund houses know that the private guy has 60 percent more to sell, and yet they go to the private guy and keep pleading for share allotment and keep asking to be made the anchor investor.
“Instead the funds should say, dafah ho ja (get lost), they should say ‘stay out’... just send us your proposal, don’t show us your face’. That, they (fund houses) will take a look at the valuation and then decide. The fund houses should remember that the private guys have 60-70 percent more to sell.
“They (the institutional investors) have brought down the valuation of the bechara government guys (PSUs public issues) to a third,” he said.
If the fund houses don’t manage to bring down the price, then the market will do it for them, Arora said. Over the last one-and-a-half years, at least 21 IPOs with issue size above Rs 1,000 crore are trading below their issue price.
With a deep correction, especially in the US tech stocks, and growth for digital companies getting normalised after the hyper growth during the Covid times, valuation in private markets should correct.
“Companies should no longer ask for higher valuation of the previous year (2020-21) but (should ask for valuation) from two years back (2018-19),” said Arora.
So far, since the start-up run has been only one way–rising – every new round of funding happens at a higher level and public markets have been exploited by private investors for the exit.
The exuberance around tech businesses ensured that investors were more keen to participate in the public issue rather than be left out. But most high-profile IPOs have been disastrous because their pricing was aggressive, leaving little room for upside.