IVCA Conclave 2021: IPO markets are hot but you can't always time it

Private equity investors are bullish about the exit environment but stressed on the importance of building fundamentally solid companies which can go public even during a challenging market situation, they said at the IVCA Conclave 2021.

Bhavna Thakur, Managing Director, Capital Markets at Everstone Capital said, “2020 was the most remarkable year. We had to pull one IPO just a week before the lockdown. But we still had 7 exits during the year, and 2021 is primed to be even better."

“The year (2020) started out on a tough note but the public market buoyancy has been phenomenal. The exit environment is really vibrant and the secondary markets are also very active. Today as Asia focused funds are getting larger, you can have a secondary exit of a billion dollars or so,” said Shweta Jalan, Managing Director, Advent International.

Secondary exits are when an investor sells his/her shares to another incoming private investor rather than going public or being acquired.

Investors are also excited about Special Purpose Acquisition Companies (SPACs)- the new rage in the US which makes it easier for companies to go public via a blank check company. “SPAC is a huge liquidity pool for exits that can't be ignored. But most SPACs have raised about $250 million and are looking for companies between $750 million to a billion in valuation. So they are looking for size,” Thakur said.

“There is more money than there are good companies,” she added.

Excitement is also being spurred by the global and Indian stock markets and listings which have done phenomenally well on debut. In India, the listing of Burger King, Route Mobile and Happiest Minds have made private equity investors even more bullish.

“In the last quarter we (India) have seen more than 15 IPOs. It is pretty amazing. The market is more accepting of PE-backed professionally run companies, rather than wondering about promoter shareholding. Today’s IPO can be a 6-9 month cookie cutter process,” said Amit Mehta, fund manager, private equity at IIFL AMC.

He also said that today’s public market valuations are even more generous than what strategic investors provide- which is generally the upper end of the valuation spectrum, since strategic investors see the company as more than a pure financial play.

But investors still stressed that you can’t always time the market. Sometimes there is a short window within which companies can go public, but the long term solution is to build sound companies.

“Good companies with strong management teams will always find an exit, irrespective of the environment. Timing is important but backing the right companies is more important,” said Gaurav Ahuja, Managing Director at ChrysCapital.

Shivani Bhasin Sachdeva, founder and CEO of PE firm India Alternatives agreed. “Keep the mechanism aside and look at the underlying exits. Some of the investment theses got accelerated during the pandemic and there was a flight to quality. You cannot time the exits but you can be opportunistic. Finally, if you have the right moat you will get that exit,” she said.

Investors also wished for Indian companies to be able to directly list abroad, something the government has been considering for a while now. “Overall you can't argue against overseas IPOs. They have the potential for better reception and better valuation. You can find more institutional investors and sometimes the IPO process can be streamlined more. The removal of dual listing is a boost to this,” Ahuja said.

Even for SPACs, Thakur said there are certain regulatory issues related to RBI approval around resident shareholding that need to be ironed out.

Despite an improving exit scenario, Jalan of Advent said that she would like to see an IPO exit for a controlling stake in the company. “There is really no example of that. Where an investor owns 60-70% and then you exit. I would really like to see that,” she said.

But while India has always been a somewhat tricky market for exits, investors agreed that the situation is consistently getting better.

“The exit scenario is improving over time and getting better. If you keep Covid aside and look at it from a decadal point of view, there have been $80 billion in exits, and more than 60% of this has been after 2018, in the last couple of years,” said Sachdeva.