The pressures of an IPO boom
The year 2021 could well be bestowed with the title- year of the IPO. From January to October 21 there have been 52 IPOs raising approximately US$14.88 billion. This is a new record for primary fund raising by companies in India. The previous peak was US $ 10.36bn with 36 companies raising funds in 2017. For the prior record you must go back to 2010 which saw a record of 64 IPOs and fund raising to the tune of US $ 8.34bn. There is no one single cause that leads to such records, it is always a combination. India has witnessed strong FDI via PE and VC funds in recent years and this money has incubated many young startups or growing businesses. A conducive market powered by significant liquidity and attractive valuations led companies to take the plunge this year. Note that a significant portion of the IPO fund raising is by way of sale of shares by existing shareholders-which is perforce a necessity when companies are funded by PE/VC funds that would have a 5–8-year life cycle.
As an investment organization our role requires us to analyze these new offerings and that has been a source of strain this year given the sheer volume of IPOs. During this year till November the team has analyzed and discussed 46 IPO bound companies, including a few that are yet to launch their IPO. In addition, there are several companies that were dropped at an early stage. Every IPO calls for several hours of effort from the analyst- for completely new business models it could be as much as 30-40 hours of effort by the analyst. For reasonably mature companies or well understood business models & industries the time taken could be to the tune 6-8 hours. Further there is time spent by fund managers with our analysts and in pre deal investor education meetings with the analysts of the bankers managing the IPO. These days we also find it useful to meet with firms that are not bankers to the IPO; because you often pick up different signals from them. At the end of all this effort you get a maximum of 1 hour face to face with the company. Our process has been to get as much understanding as possible before the meeting with management. That way the meeting is focused on asking the questions to which we are seeking answers, rather than having the management run through a standard presentation deck.
The challenge is that very often one is dealing with limited information. While the quality of disclosures in the DRHP have significantly improved over time- most provide financials on average for 3-4 years. As a result, we have limited understanding of how the companies have performed over a cycle. Further with several new age companies coming to the market this year, their business models have morphed so rapidly that the relevant key performance indicators themselves have changed or evolved. And maybe the company is yet to experience a difficult cycle.
Out of these 46 companies we brought 13 companies under coverage and invested approximately Rs 400cr (at IPO price). This is combination of our participation as anchor bidding participation in the main book of the IPO. We suspect we will learn more about these companies as we meet them and understand their thoughts better over time. There could be both pleasant and unpleasant surprises. Our approach is to back the companies that make it through our filters at the IPOs stage but to limit exposure. As we learn more, we would be willing to enhance exposure. History tells us that you don’t have to be an investor in an IPO to make a successful investment in a company. What makes a difference in a successful investment is to have a reasonable exposure and the conviction to own it through cycles and the mood swings of Mr Market.
The current pace of the IPO market may we well turn out to be transient. I suspect our analysts are hoping for that. That word transient has been the constant refrain of several central banks during this year in the context of inflation numbers that have surged. The US Federal reserve now says that the time has come to retire the word ‘Transient’. Policy settings across the world are still at the emergency levels that were deemed fit in the early stages of the pandemic. Given the recovery in growth we see the retirement as a process of reverting the policy settings back to normalcy. There is fear about the new variant ‘Omicron’ and a surge in knowledge about Greek alphabets and the letters that went missing. Hopefully vaccines and the continued practice of safe protocols will keep us safe.
Above commentary is published in UTI Fund Watch (monthly factsheet) in the section of Update from CIO’s Desk, click here to refer to the factsheet.