Secondary Deals Accelerate as IPO Market Faces Headwinds
In Mumbai, the financial landscape is witnessing a significant shift as secondary deals gain momentum, driven by investors seeking exits and liquidity amidst a cooling initial public offering (IPO) market. This trend is largely attributed to war-driven volatility that has introduced uncertainty into global investment decisions.
Investors Opt for Discounted Exits in Uncertain Times
Gopal Jain, Managing Director and CEO at Gaja Alternative Asset Management, highlighted the current scenario, stating, "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." Secondary transactions involve the transfer of shares among investors without any primary fund infusion, providing a crucial avenue for liquidity in turbulent markets.
Early Signs Point to Explosive Growth in Secondary Deals
Rohit Mantri, Managing Director and co-head of private equity at Motilal Oswal Alternates, noted that approximately 10% to 15% of IPO-bound companies are now pursuing secondary deals. He described this as "early signs" but warned that if markets remain choppy, the volume of such transactions could explode from the second half of the financial year. Mantri added, "About 50% of IPOs with a market cap of over Rs 5,000 crore that happened last year are trading below their issue pricing now," underscoring the challenges in the IPO space and the broader consensus for a rebound in H2.
Deal Closures and Pricing Rationalization Drive Momentum
Siddarth Pai, founding partner at 3one4 Capital, pointed out that while investors are willing to sell at discounts through secondary deals, they prioritize quick closures. "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," he said. Companies requiring acquisition financing or capital expenditure are increasingly turning to private markets as IPOs dry up, while investors rely on secondary deals for liquidity.
Mantri further explained that private equity investors have rationalized their pricing expectations following corrections in the stock prices of publicly listed companies, which is facilitating more secondary deals. This adjustment is helping bridge the gap between buyer and seller expectations in a volatile market.
Macro Pressures and Dedicated Funds Fuel Secondary Market Expansion
Prabhav Kashyap, partner at Bain & Company, emphasized that extended hold periods and a growing pool of motivated sellers have been building over 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," he said. Secondary deals have been favored since the COVID-19 pandemic, but a notable change is the emergence of dedicated secondary funds.
For instance, PE firm TR Capital recently announced plans to invest up to $1 billion in secondary transactions in India over the next five years. Kashyap noted, "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." This development indicates a maturing market where both supply from sellers and demand from dedicated funds are aligning to drive growth in secondary transactions.
Overall, the surge in secondary deals reflects a strategic pivot by investors navigating a challenging IPO environment, with discounts, quick closures, and dedicated funding streams shaping the future of India's private equity and investment landscape.
