Buoy­ant pri­mary mar­ket at­tract­ing in­vestors to pre-ipo fund­ing rounds


Abuoy­ant ini­tial pub­lic of­fer­ing (IPO) mar­ket has prompted in­vestors to in­vest in so-called pre-ipo fi­nanc­ing rounds as a means to plac­ing size­able bets on com­pa­nies that are about to go pub­lic.

So far this year, com­pa­nies have raised at least $600 mil­lion through pre-ipo fund­ing rounds, ac­cord­ing toa Mint anal­y­sis. The ac­tiv­ity has been led by large deals such as the $383 mil­lion pre-ipo fund­ing round by a con­sor­tium of in­vestors led by War­burg Pin­cus in ICICI Lom­bard Gen­eral In­sur­ance Co. Ltd and IIFL Special Op­por­tu­ni­ties Fund’s $60 mil­lion bet on Re­liance Nip­pon Life As­set Man­age­ment Co. Ltd.

It is not just pri­vate eq­uity funds and ded­i­cated pre-ipo funds such as IIFL that are look­ing for these op­por­tu­ni­ties. Sev­eral pub­lic mar­kets-fo­cused in­sti­tu­tional in­vestors such as hedge funds, fam­ily of­fices and high net-worth in­di­vid­u­als, too, have tapped pre-ipo fi­nanc­ing op­por­tu­ni­ties. In Septem­ber, Mint re­ported that Ipo-bound Prataap

Snacks Ltd had raised Rs50 crore in a pre-ipo round from pub­lic mar­ket in­vestor Mal­abar In­vest­ments. In the fol­low­ing month, Mint re­ported that pri­vate eq­uity firms Aditya Birla Pri­vate Eq­uity and Mul­ti­ples Al­ter­nate As­set Man­age­ment had sold part of their stakes in Ipo-bound In­dian En­ergy Ex­change Ltd to sev­eral high net-worth in­di­vid­u­als and SBI Life In­sur­ance Co. Ltd days be­fore the com­pany’s IPO.

Ac­cord­ing to in­dus­try ex­perts, one of the ma­jor fac­tors for the surge in pre-ipo fund­ing rounds is the need of in­vestors to achieve mean­ing­ful al­lo­ca­tion of shares.

“Mar­kets have been on a roll, the over­all en­vi­ron­ment has been good and we are see­ing a lot of IPOS com­ing to the mar­ket. Do­mes­tic funds are flush with liq­uid­ity, es­pe­cially mu­tual funds. In an en­vi­ron­ment like this, every­one vies for al­lo­ca­tion, but there is only a lim­ited amount of stock avail­able in an IPO,” said Satyen Shah, head of Edel­weiss In­vest­ment Bank­ing.

Shah added that there is strong ap­petite for these pre-ipo op­portu- ni­ties among all classes of in­vestors.

“Pub­lic mar­ket fo­cused funds are also will­ing to look at these, as also pri­vate eq­uity funds that also in­vest in listed en­ti­ties and there are a lot of HNIS and fam­ily of­fices that are look­ing at it. There is a lot of liq­uid­ity and every­one is fight­ing for al­lo­ca­tion. PRE-IPO guar­an­tees al­lo­ca­tion and so many in­vestors are look­ing at them,” he said.

In­sti­tu­tions, flush with funds, are look­ing for newer ideas and IPOS of­fer those in­vest­ment ideas to these in­vestors. Ac­cord­ing to Prithvi Haldea, chair­man of Prime Data­base group, a pri­mary mar­ket tracker, while al­lo­ca­tion needs are driv­ing in­vestor de­mand for these op­por­tu­ni­ties, is­suers, too, have their rea­sons to look at such op­por­tu­ni­ties.

“From a is­suer per­spec­tive, get­ting a re­puted in­sti­tu­tional in­vestor back­ing ahead of the IPO can help re­duce the anx­i­ety around rais­ing funds through an IPO. Also, is­suers can get a pric­ing bench­mark. If in­sti­tu­tional in­vestors have bought shares ahead of an IPO at a par­tic­u­lar price, then that gen­er­ally ap­pears to be good price,” he said.

To be sure, while pre-ipo rounds guar­an­tee al­lo­ca­tion, shares bought be­fore an IPO come with a one-year lock-in from the date of list­ing. How­ever, given the suc­cess­ful run the IPO mar­ket has seen so far, in­vestors don’t ap­pear to be fazed by the risk of a lock-in pe­riod, when they can’t sell the stocks.


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