M&As, strategic sales make up for sluggish IPO market to aid investor exits

Exits through strategic sales/M&As created 69% of liquidity events

The Initial Public Offer (IPO) market, mirroring the broader secondary market, has been sluggish this year. However, that has not hurt investors looking for exits, as other modes of doing so have come into play. Exits through M&As or strategic sale accounted for 69 per cent of all liquidity events this year. 

This was followed by exits through open markets (13.2 per cent) and secondary sale (12 per cent), reveals an analysis of liquidity events in 2018 so far by data firm VCCEdge. This shows that, unlike earlier, investors are less dependent on IPOs for exits. 

Private equity (PE) exits are at an all-time high this year, surpassing the previous landmark year of 2017 by nearly 75 per cent in value. Strategic sales accounted for a majority of the exit activity, mainly on the back of the Walmart-Flipkart deal. 

Vivek Pandit, senior partner at Mckinsey & Co, says strategic investors are more comfortable with the quality of assets and investors are doing a better job in positioning of such assets to them. ‘‘The IPO market is volatile and often driven by sentiment, while strategics can take a longer-term view on the value of these assets,'' he says.

While it might be tempting to compare exits through IPOs with strategic sales the fact is these exit options operate with different assumptions. ‘‘Strategics care a lot about long-term strategic value to them, while IPO markets are often about timing and investor sentiment at a point in time, particularly true in more volatile emerging markets,'' Pandit adds. 

Secondary sales witnessed a significant spike over previous years and are currently at a record high in terms of deal value. Considering the levels of dry powder and the need for liquidity within the investor community, secondary sales are gaining importance and could become a preferred mode of exit, feels Sanjeev Krishan, PE and deals leader at consultants PwC. ‘‘While 2017 was a standout year for PE-backed IPOs, 2018 witnessed a fair bit of public market volatility, which could have triggered the decline in terms of exit value across PE- backed IPOs,'' he says.

Within the overall increase in exit activity, the rise in M&A and strategic sales have been driven by a variety of factors, Darius Pandole, chief executive for PE and equity AIFs at JM Financial, told Business Standard a few weeks earlier. One, there's greater maturity among PE investors, who have seen various business cycles, and are more open to acquiring or selling controlling stakes in companies. Two, PE investors are willing to explore different exit strategies to return capital to investors. 

Three, issues of succession planning as family businesses scale up, with the next generation wanting to do something outside of the traditional family business, are also creating opportunities for M&As. Finally, young entrepreneurs who have set up successful businesses with PE/VC funding, and are open to exit in a defined timeframe.