Record average deal size lights up IPO Street

The average initial public offering (IPO) size so far this year has been the highest in the history of the domestic market aided by big-ticket offerings such as SBI Life Insurance and ICICI Lombard.

A total of 23 IPOs hit the market this year and raised ~30,385 crore, translating into a record average deal size of ~1,321 crore (over $200 million). This is a 30 per cent increase over last year, and twice the average deal size for the year 2010, when the mega Coal India offering came up.

Industry players say an improvement in the average deal size is a healthy sign. This helps investment banks— their fixed costs remain the same irrespective of the deal size— and also boosts participation of large-size investors, who, typically, don’t invest in smallsize issues on liquidity concerns.

This year has seen five IPOs with a size in excess of ~1,700 crore. Three of them are from the financial space, a sector which is proving to be a darling for the stock market investor.

“We are seeing billion-dollar offerings coming into the market, a lot of them from the financial sector, which would further increase the average deal size of IPOs. Given the liquidity conditions, we expect the market to be supportive of these large-size deals. The financial sector, especially, will see a lot of diversification, with new sub-sectors such as life insurance, general insurance and asset management companies being added,” said Sanjay Sharma, ·managing director, equity capital markets, Deutsche Equities India.

Though the previous two calendar years had been good for the IPO market, bankers had been complaining about low-deal size. For instance, 2015 saw 21 IPOs but the total funds mobilised were only ~13,614 crore, at less than ~650-crore a deal.

“Large-ticket IPOs are a positive on several fronts. They add to the market free float. Currently, a large amount of liquidity is chasing the same stocks, potentially creating a valuation bubble. The new paper supply will help keep the market valuations in check, as it will provide additional avenues for the excess liquidity deployment,” said an investment banker.

Investment bankers expect the average deal size to improve from current levels, given the lineup of big-ticket IPOs, including GIC Re, New India Assurance, HDFC Standard Life and the NSE. The average deal size has also seen a structural improvement post 2012 when separate platforms for small and medium enterprises — those with paid-up capital of less than ~25 crore — were launched. For instance, 2007 — a record year for the IPO market in terms of total funds raised — had 23 IPOs of less than ~70 crore in size. Similarly, 2010 saw 37 IPOs of less than ~70 crore. Following the launch of these platforms by BSE and NSE, tiny deals were not launched on the main bourse. If IPOs of less than ~100 crore were to be excluded, the average deal size for 2010 and 2007 would be ~806 crore and ~706 crore, respectively.