Are IPOs injurious to wealth?
Whether IPOs are PE backed or not, there’s a mystery surrounding them.
That sets the stage for talking heads to pontificate the virtues of investing in IPOs and how over a long period investors have become millionaires by buying Infosys or TCS, or Hindustan Unilever – the last being from a different era of price controls.
Success stories are not universal, and the era of Infosys and Coffee Day Enterprises are different.
Is IRCTC an aberration? May be! As a concept, it is a company that can be described as MakeMyTrip and Zomato rolled into one! Unlike others, it makes money too! Fortunately for retail investors, IRCTC was not sold that way because the owner, ie, the state, and the managers it hired were not as savvy as private issuers are where more than 90 per cent of offerings come from! Be that as it may.
In fiscal 2019, 10 out of the 18 that listed fell an average 9 per cent on listing day. In insurance companies that were the biggest fundraisers in FY17 and FY18, investors lost an average of 8.3 per cent in half these issues on the listing day, KPMG research shows. A key differentiator in the IPO market from the days of Infosys is the role of private equity investors.
Many things go into the pricing of IPOs, above all is the investor sentiment. IPOs flood when the mood is optimistic that, in hindsight, is described as irrational exuberance.
Although IRCTC and other digital companies such as Yatra are in similar lines of business, they don’t get sold alike. In unlisted space, it is the valuation game among private equity investors. But that’s just unravelling even at the global level. Look no further than WeWork, which was valued at nearly $47 billion by Softbank, and it had to scrap its IPO when investors balked at the valuation.
Private equity money is quite smart. While it helps industry raise capital for expansion at an early stage, it ends pumping up the valuation when it comes to public listing. After all it needs to exit. In fact, most of the IPOs in the past three years have led to transfer of money from public investors to private funds and shareholders.
About Rs 1.24 lakh crore was raised in three fiscal years through IPOs. Of these, 48 per cent were by 39 PE-backed firms. Of the total funds raised, 78 per cent were offers-for-sale meaning transfer of funds from public investors to private and not into the company.
“In terms of listing day returns, the non-PE backed companies performed better than their PE backed counterparts,” says KPMG research. “Basis the PE ratio at which the shares were offered, the 27 PE backed companies, on an average, priced their shares at a premium to industry.”
Whether IPOs are PE backed or not, there’s a mystery surrounding them. It is not for nothing that the best on the planet doesn’t buy into IPOs.
“It’s almost a mathematical impossibility to imagine that of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company) to a less-knowledgeable buyer (investor),” said Buffett.
IPOs have cooled off this year. But it may be a temporary break. One prospective IPO is that of SBI Cards. The company is likely to be valued at Rs 57,000 crore, up from Rs 8,000 crore when buyout firm Carlyle invested in it, Shilpy Sinha reports in ET’s Nov. 11 edition.
There was a time when PEbacked firms received higher valuation because of their likely due diligence and corporate governance. But the blow-ups of Manpasand Beverages and Coffee Day Enterprises puncture those theories too.
Value is one that has many formulae, where investors are prone to making mistakes. But the regulatory dichotomy promoted by the Securities & Exchange Board of India between minimum public holding of 25 per cent and the minimum float at the time of IPO is one window that enables share sales at puffed up valuations.
The drive to get richer will rule both private and public investor and the success would be more chance than design, as few have the discipline of Buffett.
“There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich,” wrote Charles Kindleberger.