As IPOs lose steam, investors cash in on secondary deals

Mumbai: Secondary deals are picking up pace as investors are looking at ways to exit their investments and get liquidity amid cooling of the IPO market on the back of war-driven volatility. "Globally, investment committees are postponing decisions, leading to funding delays. The secondaries market has picked up and we will see a lot more deals happening. In an uncertain environment, investors looking to offload stakes would be willing to sell them at a discount to get some liquidity," said Gopal Jain, MD & CEO at Gaja Alternative Asset Management. In secondary transactions, shares change hands among investors and there is no primary fund infusion.

Currently, about 10%-15% of IPO-bound companies are going for secondaries, said Rohit Mantri, MD & co-head, private equity at Motilal Oswal Alternates describing the deal momentum as "early signs" but if markets remain choppy, the volume of such deals will explode from the second half of the financial year, he said. Transactions are also taking time to close. "Investors are willing to sell at discount through secondary deals but they want the deals to close quickly. There are also not very large M&As happening right now," said Siddarth Pai, founding partner at 3one4 Capital.

Companies which need acquisition financing or capex related requirements are accessing private markets again given IPOs have dried up while investors are banking on secondary deals for liquidity. What is helping secondary deals is the fact that private equity (PE) investors have rationalised their pricing expectations after correction in the stock prices of public listed companies, said Mantri. "About 50% of IPOs with market cap of over Rs 5,000 crore that happened last year are trading below their issue pricing now," said Mantri, adding that the broader consensus is that IPO markets will rebound in H2.

Extended hold periods and a growing pool of motivated sellers have been building for some time. In parallel, macro pressures stemming from the recent conflict are creating additional headwinds for traditional exit routes, increasing the need for alternative liquidity solutions, said Prabhav Kashyap, partner at Bain & Company.

Secondary deals have been in favour since Covid times but what has changed now is that investors are setting up dedicated secondaries funds. PE firm TR Capital, for instance, last week said that it sees an opportunity to invest up to $1 billion in secondary transactions in India over five years. "What's notable is that dedicated secondary capital is now scaling up its India presence in parallel, so you have supply and demand developing simultaneously in a meaningful way," said Kashyap.
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