The IPO gamble: The odds seem stacked against investors
Public issues have delivered little, with their success rate abysmal from an investor perspective, even as private equity players have used them as an exit path. Big chunks of the public money raised in India have been getting repatriated overseas.
Of the 275 initial public offers (IPOs) in India since the covid lockdown, 35% have delivered negative returns on their issue price. Compared to their listing price, which is the price at which shares start trading, almost half have delivered negative returns. About half underperformed the BSE 500 index’s return in terms of gains on their issue price and 64% in terms of gains on their listing price. Only 36% of IPOs over the past five years have been a worthwhile investment.
Surprisingly, qualified institutional placements (QIPs) fared only marginally better. Of the 224 QIPs since the pandemic, only 99 have outperformed the BSE 500 index, giving these professional investors a success rate of 44%.
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An analysis at this time is important as the IPO market is stirring again after a recent lull. Why the success rate of IPO investments is poor is not hard to figure.
The transaction is lopsided; a deeply informed and highly motivated seller meets far less informed buyers. The seller is either the promoter of the company going public or an existing private equity investor who is privy to superior information about the company. The buyers, however, even if they are institutional investors, make their investment decisions on the basis of an hour-long presentation (or interaction) and a few ancillary checks with suppliers, customers or bankers at best.
The situation becomes even more lopsided when an army of cheer-leading investment bankers go all out to create a glib slide deck and make the road-show management team cram in all the buzzwords that investors want to hear. Some investors get swayed by rare IPO success stories that begin with: “Had you invested ₹10,000 in the Infosys IPO…," missing the fact that for every Infosys and Wipro IPO, carcasses of many others lie in their demat accounts. This also misses the fact that hardly any investor stays invested for long.
An additional dynamic in the recent IPO cycle has been that of private equity sellers. Earlier, new money raised was either invested in the company (in case of a primary issuance) or went to promoters selling some of their stake. Now, many IPOs involve a private equity firm making an exit. Of the 275 IPOs mentioned earlier, 101 had a private equity owner selling its stake (PE-IPOs). The success rate of these is worse, at 30%.
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Apart from the fact that PE-IPOs seem finely priced, note that the money so raised is not invested in the company. In most cases, it is repatriated to the home country of the PE fund. This trend has been evident in India’s foreign direct investment (FDI) data. In 2023-24, while gross FDI was $75 billion, net FDI was barely $10 billion.
The gap was partly explained by the repatriation of almost $45 billion by foreign entities. The data for 2024-25 shows much weaker net FDI, with repatriation playing a major role. Numbers from a recent Bain & Company report suggest that in 2024, almost $20 billion was sent out by private equity firms that had cashed out in public markets. This does not include multinational firms like Hyundai listing their local units and sending back the share-sale proceeds.
This repatriation trend has picked up in the last five years. It is likely to continue and even accelerate as PE players are under pressure to sell their investments. Those whose money is deployed seem to be displaying some impatience.
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A recent article in the Financial Times quoting a Bain & Company report stated that distributions as a proportion of net asset value for private equity had fallen from an average of 29% between 2014 and 2017 to just 11% last year. India is one of the few bright spots in an otherwise limp global IPO market. It is therefore not surprising that PEs want to tap our domestic liquidity to book profits.
The value of unsold PE stakes in listed companies in India could broadly be in the range of $25-30 billion. The bigger source of equity supply for public markets would be in the form PE-owned unlisted firms that are looking to hit the IPO market. While it is hard to get an exact estimate, the apex body for private equity and alternate assets in India, IVCA, claims to represent $350 billion of assets under management in India. This would include investments in physical assets and credit, but it is fair to assume that a significant amount of it would be in the form of equity.
This PE-led supply will likely keep a lid on market prices. There is no single all-encompassing answer to whether public markets should provide PE investments with an exit path. But when considering whether to apply for the next IPO, it would be worthwhile to remember the odds of success.
These are the author’s personal views.
The author is the managing partner at Breakout Capital.
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