Why are PE funds eager to take IPO route?

Tue, 21 Jul Pre-Open

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Initial Public Offerings (IPOs) have created a spur these days. So far in the current fiscal, 8 companies have completed their IPOs. Further, another 22 companies have filed draft IPO papers. What is more attentive, on top of this, is that private equity (PE) funds lining up to go public.

As per an article in Livemint, the boost in the primary markets has encouraged many PE backed firms to enter the IPO route. From the above mentioned 22 companies that have filed draft IPO papers, majority are from the class of PE funds. These funds have extended their lifecycle for the past couple of years. This was backed by less than average returns due to depressed markets. The average holding period for these investments has risen to 5.7 years in 2013 as against 3.3 years in 2005. The average return from these exits has dropped to 7% in 2008 as compared to 21% until 2007. Due to these reasons, funds that are nearing the end of their lifecycle are chasing exit routes through IPOs more aggressively. Many of them are choosing this route to exit their investments with success.

As reported, fund managers are in the opinion that over the next few years, IPO exit may gain footing over secondary market transactions. The compulsion for PEs in India to show exits on investments that have reached their targeted investment time frame will push this forward. Also the continued interest from global investors in Indian markets will urge the companies to go for IPO exits. Companies have used these reasons to their advantage. They seem to take the companies to the market and list them.

However, public listing works only in the case of certain companies. The main criterion for its success depends on providing long-term investor returns. It is only with companies that provide a combination of strong management and a scalable business model with the requisite governance. Also the initial offering needs to be reasonably priced.

On the above lines we would recommend you to tread cautious with these offerings. One needs to study and evaluate the companies well before investing in their IPOs. Also if any PE is doing well, it does not convert it into a risk-proof public offering. As an investor you should look for companies which carry strong fundamental values. These companies are the ones with strong financial ratios, wide customer base, and solid, transparent management. The IPO boom may continue its drive if companies manage to deliver above average returns.