PE players and VC companies adjust to longer holds after public listing

Startup IPO boom reshapes their investment strategies

Amid a successful year for listings of new-age companies in India, private equity (PE) players and venture capital (VC) firms are now ready to hold their investments for a longer term, said industry players.

 

While secondary deals have also remained buoyant, the willingness to hold for a longer term, aiming for better performance in such startups, has increased.

 

“Initial public offering (IPO) markets in India offer a very viable path to exit. Both PEs and VCs are now seeing it as a great opportunity to exit, including in the pre-IPO rounds. The unlisted market has also been very busy. Of the $55 billion in equity activity this year, $14.5 billion is through IPOs, while $23 billion is secondary,” said Anuj Bhargava, managing director (MD) and head of corporate and strategic development for India and Southeast Asia at Lightspeed Venture Partners.

 

 

However, many believe the exit road map is now being rewritten to gauge post-listing gains.

 

“While IPOs are still the most favoured exit option for PE/VC investors, the pops in valuation after listing have caused many to reconsider their offers for sale during an IPO. Funds are also becoming cross-over funds, spanning the gap between listed and unlisted markets,” said Siddarth Pai, founding partner of 3one4 Capital.

 

“The difference of a few days may mean a 20-40 per cent difference in the returns they may earn. Exit roadmaps are being fundamentally rewritten to allow for the funds to hold for a period after the IPO,” said Pai, who also co-chairs the regulatory affairs committee of the Indian Venture and Alternate Capital Association. 

 

The IPO process in India may stretch from 12 months to 18 months. While certain funds chose pre-IPO exits in Swiggy, others changed their exit plans before FirstCry’s IPO, which led to a reduction in the issue size of the fundraising.

 

According to industry experts, another PE-backed major listing may happen this year, with Vishal Mega Mart planning to launch its Rs 8,000 crore IPO later this year.

 

Many have termed this year an inflexion point, as India saw more tech IPOs than the US markets.

 

While the ongoing market correction over the last nearly two months has eroded the returns on the newly listed startups, sentiment towards PE-backed companies looking for IPOs remains strong.

 

Iqbal Khan, partner and national corporate lead at JSA Advocates & Solicitors, is of the opinion that the robust performance of India’s IPO market is compelling PE funds to review their strategies.

 

“It is prompting PE funds to adjust their strategies by opting for longer IPO processes rather than the relatively shorter sell-side auction route, to capitalise on favourable market conditions and maximise exit value,” added Khan.

 

Blackstone-backed companies — Ventive Hospitality and the International Gemological Institute (IGI) — are also eyeing listings this financial year.

 

According to sources, Blackstone, the largest PE investor in India, may hold onto part of its stake depending on the response. Blackstone and its local partner aim to raise Rs 2,000 crore by selling up to a 10 per cent stake in Ventive Hospitality, while a similar-sized sale in IGI is expected to bring in Rs 4,000 crore.

 

Experts added that along with the optimism in the markets, the regulatory process has also become clearer, which has helped the ecosystem.

 

“The approvals are now happening as early as three months from the date of filing. While the scrutiny is now strong, with very specific questions being asked, the regulator is still keen to listen to the issues raised by PEs. Recently, it also went back on its decision regarding special rights of PEs on the filing of documents,” said another legal player.

 

The Securities and Exchange Board of India had in 2022 also allowed a confidential filing route for draft documents for an IPO, which industry participants believe also helps startups test the waters.

 

Legal experts said that many PEs and VCs are now also advising investee firms to flip to India and explore opportunities in the domestic market.

 

“PE funds have also been keenly exploring opportunities to consolidate their overseas holdings with compatible unlisted portfolio companies in India. While strategic considerations, operational synergies, and legal and tax challenges remain relevant, the key factor driving the current trend appears to be the buoyant domestic IPO market, with funds eyeing post-consolidation IPO opportunities for their unlisted Indian portfolio companies,” said Khan.

 

While several companies like PhonePe, Pepperfry, and Groww have successfully made this transition back home, many others like Zepto and Meesho are reportedly considering the shift.

 

“Indian markets have shown confidence in new listings, prompting companies to shift focus back home. Factors like a growing domestic customer base, an improved IPO ecosystem, and the availability of capital are making India an attractive option,” said Prateek Indwar, MD and head of capital markets at InCred Capital.

 

With inputs from Dev Chatterjee