India: PE-VCs to push ahead with IPO plans of portfolio firms after stellar 2020 listings

Photo: Hindustan Times

Despite the COVID-led fog of uncertainty, private equity (PE) firms and venture capitalists (VCs) are rushing the IPO plans of their portfolio firms in India, perhaps encouraged by stellar listing gains of several companies in 2020.

The latest to do so is American private equity giant Blackstone that has reportedly launched preliminary talks with bankers to list two of its portfolio firms, Sona Comstar and Aadhar Housing Finance, on the exchanges.

While global auto component maker Sona Comstar is said to be looking to raise Rs3,500-4,000 crore ($478-546 million), Aadhar Housing Finance is reportedly planning an up to Rs7,500 crore ($1 billion) share sale.

These are not the only ones. According to data collated by capital market-focused research firm PRIME Database, as many as 12 PE/VC-backed companies have already got the approval from the market regulator Securities and Exchange Board of India (SEBI) to launch their IPOs this year. Together, they could raise Rs11,226 crore ($1.53 billion) and pave the exit of their existing backers. These include casual dining chain Barbeque-Nation Hospitality, housing finance firm Home First Finance Company, and Suryoday Small Finance Bank Ltd. (See table below)

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Forthcoming IPOs where PE-VCs are selling stake

CompanyVetting
Date
Sebi
Approval
Date
Estimated
Issue Amount
(Rs.Crore)
Selling Shareholders
Apeejay Surrendra Park Hotels Ltd.2019-12-312020-03-091000Recp Iv Park Hotel Co-Investors Ltd, Recp Iv Park Hotel Investors Ltd.
Barbeque-nation Hospitality Ltd.2020-02-172020-07-071000Aajv Investment Trust, Alchemy India Long Term Fund Ltd., Menu Pvt.Ltd. , Pace Pvt.Ltd. , Tamara Pvt.Ltd.
Coldex Ltd.2018-11-292019-03-15Sabr India Investment Pvt.Ltd.
Craftsman Automation Ltd.2020-12-16800International Finance Corp.
ESAF Small Finance Bank Ltd.2020-01-062020-03-20976.24Pi Ventures Llp
Home First Finance Co.India Ltd.2019-11-292020-02-251200Bessemer India Capital Holdings Ii Ltd.
Indigo Paints Ltd.2020-11-112020-12-311000Sci Investments V, Sequoia Capital India Investments Iv
National Commodity & Derivatives Exchange Ltd.2020-02-122020-04-09500Investcorp Private Equity Fund I (Formerly Known As Idfc Private Equity Fund Iii), Oman India Joint Investment Fund
Samhi Hotels Ltd.2019-09-242019-11-292000Goldman Sachs Investments Holdings (Asia) Ltd., Gti Capital Alpha Pvt.Ltd., International Finance Corp.
Shriram Properties Ltd.2018-12-262019-04-091250Omega Tc Sabre Holdings Pte.Ltd., Tpg Asia Sf V Pte. Ltd., Wsi/Wsqi V (Xxxii) Mauritius Investors Ltd.
Stove Kraft Ltd.2020-02-032020-04-30500Sci Growth Investments Ii, Sequoia Capital India Growth Investment Holdings I
Suryoday Small Finance Bank Ltd.2020-10-012020-12-231000Gaja Capital Fund Ii Ltd., Gaja Capital India Aif Trust (Represented By Its Trustee, Gaja Trustee Com.Pvt.Ltd.), International Finance Corp.
TOTAL11,226
Source : primedatabase.com

“Over the last two years or so, a number of PE-backed companies have been exploring IPOs in order to raise fresh capital and to provide an exit for existing PE-VC investors,” said JM Financial managing director & CEO, PE & Equity AIFs, Darius Pandole.

Even as the trend was interrupted with the onset of COVID-crisis early last year as well as the collapse in the equity markets in the first half of 2020, “there now seems to be a perception that the worst is behind us. With the equally sharp recovery in the equity markets during the second half of 2020, the trend of companies planning IPOs has been reignited,” added Pandole.

Indian stocks have rebounded sharply after giving up about a third of their value in March on pandemic fears. The benchmark index S&P BSE Sensex ended 2020 with a 16% gain, beating the average 10% annual gain over the previous 10 years. The NSE Nifty 50 Index advanced 15% during the year.

Further, the recent efforts by global central banks, as well as the Reserve Bank of India, have completely changed the scenario to one of excess liquidity, driving the valuations of select sectors such as pharmaceuticals and IT to an all-time high.

“The trick is interest rates. At present, with many countries working out several stimulus packages, there is plenty of liquidity in the system. With tepid interest rates and high liquidity, investments are flowing into the market,” said Transaction Square founder Girish Vanvari.

Typically, a single PE cycle lasts for about three to five years after which returns depend on exits that can be in the form of a trade sale, public listing, recapitalisation, or secondary sale. VC investment cycles, on the other hand, generally last five to seven years.

While trade sale is the most common exit method for private equity investments as trade buyers from the same industry are often more likely to realise synergies, public listing takes place during positive market conditions. Strategic sale options are typically pursued by fund managers when they try to make a full exit from their portfolio companies.

“Your exit route is somewhat dependent on your entry construct,” said ChrysCapital MD Gaurav Ahuja. “Sectors that experienced less demand disruption and demonstrated higher resilience saw higher investor interest. Technology and healthcare are two such sectors. Going forward, as the economy opens up and activity levels pick up, other sectors like consumer, retail, auto, etc. will also begin to see some re-rating.”

The reason why investors of private companies are currently looking to exit through the IPO route is that it could give them higher valuations than those of the alternative exit options.

“I believe that 2021 would be better for PE exits in terms of domestic IPO market….even as domestic M&A deal activity is expected to improve, it will remain moderated given the pandemic impact,” said Grant Thornton partner Raja Lahiri. “Inbound deals are expected to be moderated as global corporations will become cautious on overseas investments,” he added.

The outlook of emerging markets looks positive at present, which is getting reflected in the recent strong FII fund inflows as well. As a consequence, the IPO market looks very attractive for exits due to exceedingly well-performing indices as well as higher valuation multiples for select sectors and emerging business models.

Global funds purchased net Rs1.703 trillion worth of Indian stocks in 2020, compared with a net inflow of Rs1.01 trillion in the previous year, according to data on the NSDL website.

“It is important to recognise that IPO-linked exits by private investors enable listed market investors to benefit from an exposure to fast-growing sectors which have historically had minimal representation in the listed markets such as pathology labs, technology-related opportunities, outsourced manufacturing, etc.,” said Pandole.

Blockbuster 2020 for IPOs

Even as the COVID-19 crisis kept businesses and investors on tenterhooks last year, there were historic blockbuster listings.

According to data available with research firm Venture Intelligence, as many as six PE- or VC-backed IPOs were clocked in 2020 that together raised $1179 million — a whopping 320% increase in value from 2019 that witnessed five exits worth $281 million — owing to the bumper listing of SBI Cards & Payment Services that helped its existing investor Carlyle to make a partial exit.

Among other prominent public issues that enabled investors to cash out profitably were those of processed foods firm Mrs Bectors Food Specialties, IT Services firm Happiest Minds Technologies, and diagnostic services company Metropolis Healthcare.

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Top PE-VC exits via IPO (2019-20)

CompanySectorExiting InvestorsAmount ($M)Date 
SBI Cards & Payment ServicesPayment Services Carlyle951.23March 2020
Metropolis HealthcareDiagnostic Services Carlyle94.06April 2019
Spandana Sphoorty FinancialMicrofinance Helion Ventures, Valiant Capital, Kedaara Capital85.57August 2019
Mrs Bectors Food SpecialtiesProcessed Foods CX Partners, Gateway Partners67.85December 2020
Happiest Minds TechnologiesIT Services JP Morgan61.6September 2020
Source: Venture Intelligence

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Top PE-VC Exits via Strategic Sale (2020 & 2019)

CompanySectorExiting InvestorsAmount ($M)Date
Amplus EnergySolar Power ProjectsI Squared Capital, Infinity Alternatives3502019 April
Asian GencoThermal Power ProjectsGeneral Atlantic, Goldman Sachs, Morgan Stanley, Everstone, Norwest, Tiger Global, Ashmore2502019 December
WhiteHat JrE-LearningNexus Venture Partners, Omidyar Network, Owl Ventures142.592020 August
ShopClues.comE-Commerce - Consumer ShoppingGIC, Tiger Global, Helion Ventures, Nexus Venture Partners, Chiratae Ventures, Jungle Ventures, India Quotient, Unilazer Ventures, Beenos Partners, InnoVen Capital1002019 October
Group FMGMedia Production TrueNorth, Zodius Capital952019 November
Source : Venture Intelligence

In terms of total exits in the PE-VC industry, investors garnered $6.8 billion, compared to $10.5 billion in 2019, showed Venture Intelligence data (see below).

The total no. of PE-VC exits in India stood at 147 last year, compared with 197 in 2019.

Road ahead: Will the bull run repeat?

The pandemic has thrown up tremendous opportunities for equity investments both in the listed and private arenas. “With robust growth prevailing on capital markets currently, many IPOs are being contemplated by PE investors for partial exits,” said Transaction Square’s Vanvari.

However, that does not mean the road is devoid of challenges.

“We are now entering a period where the equity markets have experienced a year of robust stock price performance, relatively expensive valuations, and continued strong liquidity. As we have learned from history, this could be the perfect setting for an over-heated issue pricing resulting in muted listing performance,” said JM Financial’s Pandole.

This clearly signals how listed-market investors need to guard against any complacency in such situations.

Echoing the same sentiment, Grant Thornton’s Lahiri said: “PE-backed companies, especially in sectors which have got badly impacted due to the pandemic like infrastructure and hospitality, are expected to face challenges around exits and the PE holding period in these companies will need to get extended to align with the business and sector recovery.”

Startups, too, are eyeing the bourses

A host of unicorns in the burgeoning startup ecosystem — Zomato, Delhivery, Policybazaar, Flipkart, Nykaa, among others — are reportedly looking to make a debut on the bourses as they look at the next phase of growth.

“This is much needed and awaited.  Should this happen, the entire landscape will change starting with a likely listing of JIO platforms.  There are many India stories which could wave in international markets,” said Vanvari.

The Indian Government indicating its intention in May last year to allow domestic companies to list overseas without having the requirement to list in India first has been seen as a welcome move by startups and investors alike.

“The move is expected to provide a massive opportunity for high-growth companies in the country especially in sectors such as technology, healthcare, renewables, among others, to tap overseas capital markets, allowing wider access to investors and also improved valuations,” said Lahiri.  “This would provide a great opportunity for the existing PE investors in these companies, for exits,” he added.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.