IPO Slowdown Can Pose Problems to PE Players

Slowdown in initial public offerings (IPOs) can make it more problematic for private equity players to exit their investments via IPOs.

During February, three IPOs kicked off the street preceded by six in January and 15 in December. The decline can be attributed to a slowdown in the economy, buoyed by volatility in the equity markets. Nifty is down by 16% from its all-time highs. As per primedatabase.com, three out of four IPOs have given negative returns on the listing day.

Heightened FII outflows and Trump-led policies have dampened optimism in the new IPOs , especially those companies that depend on the US market for revenues or raw material.

Pranav Haldea, Managing Director, PRIME Database said, “PE firms looking for exits will have to wait till the window opens again or explore other avenues like secondary sales.”

2024 saw 40 PE-backed IPOs, compared with 30 the previous year. Out of $27 billion of PE exits, about $3.3 billion was via IPOs, up 130% over the previous year in value terms, EY analysis of VCCEdge data stated.

Slowdown signals

A major chunk of PE-backed IPOs are in the mid- and small-cap space, reporting significant volatility and price contraction in the recent past.

Vivek Soni, Partner and National Leader - Private Equity Services, EY India said, “If this volatility continues, it will become very difficult for ECM bankers to find buyers at listing multiples that were prevailing 60 days ago. This could lead to a slowdown in the IPO pipeline momentum and we are already seeing early signs of the same.”

He added, “As and when the markets look up, the PE players will look at the IPO route again. On the other hand, the promoters who want to sell and the companies that need growth capital in the near term, may turn to private equity instead of the public market.”

Companies backed by PE attract higher valuations on the back of established market position, growth potential, governance and operational improvements.