ANALYSIS Promoter-led IPOs outshine PE-backed issues in returns

PE investors typically enter companies years before listing, often at much lower valuations. By the time these firms hit the public markets, valuations can be stretched, and much of the growth story may already be priced in.

Retail investors evaluating investment opportunities in India’s booming IPO market may want to look beyond the brand names of private equity (PE), venture capital and pre-IPO investors backing some of these offerings.

A Moneycontrol analysis of IPO performance data shows that companies without PE backing have, on average, delivered significantly better returns both on listing day and over a longer 12-month period compared to their PE-funded peers.

PE-backed companies considered for the analysis include those with private equity, venture capital investors, holding majority or minority shares, as well as pre-IPO investors collectively holding more than 10 percent stake before the issue.

An analysis of 218 IPOs from FY20 to FY25 (excluding those from FY25 which have not completed 12 months on bourses) shows that “non-PE-backed” or promoter-led companies have generated an average listing day return of 32.86 percent. PE-backed companies have delivered a more modest 21.48 percent.

The gap widens further over a 12-month horizon. Non-PE-backed firms have delivered 75.32 percent average returns compared to 50.24 percent for PE-backed IPOs.

Median figures, often considered a more reliable indicator by removing the impact of outliers, paint a similar picture.

The median listing day return for non-PE-backed IPOs stands at 20.03 percent against 11.44 percent for PE-backed firms.

At the 12-month mark, the median return for non-PE-backed companies is 47.49 percent, while PE-backed firms have posted a median 12-month return of 31.78 percent. This shows that even the typical IPO from the non-PE group has outperformed its PE counterpart both at the listing and after a year.

The trend holds even when looking at the likelihood of positive returns.

Roughly, 76 percent of non-PE-backed companies gave listing gains, compared to 71 percent of PE-backed issues.

At the 12-month mark, 74 percent of non-PE-backed companies were in the green, while 70 percent of PE-backed companies delivered positive returns.

Exit premium for PE investors

Market experts cite several reasons for this relative underperformance by PE-backed IPO companies.

PE investors typically enter companies years before listing, often at much lower valuations. By the time these firms hit the markets, valuations can be stretched and much of the growth story may already be priced in.

In many PE-backed IPOs, the issue price reflects not just the company’s fundamentals but also an exit premium for the PE investor, leaving less room for a listing day pop or post-listing outperformance, a capital markets investment banker, who did not wish to be named, told Moneycontrol.

He said PE investors often use IPOs as partial exits, creating a supply overhang in the market. Such large PE stake sales can dampen secondary market sentiment, as investors remain wary of further sell-offs post lock-in periods, the investment banker added.

Data shows that among the top five IPOs by 12-month returns, companies without PE involvement dominate the list, with several posting multi-bagger returns for investors. Even among the best performers on listing day, non-PE-backed firms tend to outshine their PE-funded counterparts.

Investors must evaluate IPOs on a case-by-case basis

Market experts caution that while data may show that PE firms have underperformed their peers in IPO returns at an aggregate level, one must evaluate each public offering on its merit.

“Many of the companies backed by private equity funds have underperformed after listing. But it’s not uniform — the performance varies significantly from stock to stock,” said Kranthi Bathini, director of equity strategy at WealthMills Securities.

“Investors really need to look at individual companies, their business models, and valuations rather than broadly categorising IPOs based on PE or non-PE backing. Unlike earlier periods, say in the 2000s, when most IPOs used to deliver strong long-term gains, today’s IPO market is different. The pricing has become far more aggressive, often leaving little on the table for short to medium-term investors,” he added.

Investors need to evaluate IPOs on a case-by-case basis, he said.

Market experts also say even though PE-backed firms may have delivered lower listing returns, the presence of a private equity shareholder may give investors some comfort in aspects such as corporate governance.

“Investors may find some comfort when an established private equity investor is involved — it signals a certain level of due diligence and governance,” said Pranav Haldea, managing director, Prime Database. That said, investors should also check whether the PE fund is staying invested after the IPO or making a full exit. “If they continue to hold a stake, it shows they still have skin in the game, which adds confidence about long-term returns,” he said.

Haldea said when it comes to promoter-led companies, even after the IPO, they may hold an 80-85 percent stake, which has to be brought down to 75 percent in three years to comply with minimum public shareholding requirements. This makes it important for them to price IPOs attractively to ensure there is price appreciation after the listing, as they would be the largest beneficiaries, he added.