India's initial public offering and stock markets are seeing a record-breaking bull run in 2024. At the same time, large-scale private investments into public equity or PIPE deals, are showing signs of slowdown.
As per data from 1Lattice, as of August 2024, 17 PIPE deals have been closed with a total value of $2.73 billion. In 2023 and 2022, their value stood at $6.74 billion and $5.25 billion, respectively.
"As of August 2024, capital deployment in PIPE transactions represented only 5% of total deal value, compared to 10% in 2023, reflecting a significant slowdown," says Devmalya Mukherjee, director-financial investors at 1Lattice. "This dip is driven by weaker macroeconomic conditions, marked by high interest rates, softened consumption, heightened geopolitical tensions, and a persistent buyer-seller valuation mismatch."
(Source: NDTV Profit)
(Source: NDTV Profit)
PIPE deals are mostly sealed by large institutions like mutual funds, private equity funds, pension funds, insurance companies, etc. into publicly traded stocks. According to experts, such deals, which went up significantly when the bull run in the stock markets kicked off in 2022 and 2023, are no longer the flavour of the season.
One of the reasons being sky high valuations. "PE investors are wary of investing at these valuations. They believe that these valuations are not cheap," comments Arun Kejriwal, a market expert. In 2024 year to date, benchmark indices Sensex and Nifty have hit lifetime highs over 20 times.
"PIPE deals are generally undertaken by institutional investors in relatively smaller companies. They buy in bulk quantities with a long-term perspective. In the current scenario, the valuations of most of these companies have gone up, and their appetite has also gone down," says Vaibhav Porwal, co-founder at Dezerv, a portfolio management services company.
But valuations are the only reason. "High valuations continue to challenge the PIPE deals segment, as promoters often demand prices comparable to similar companies, making deal closures more difficult. However, this isn't the only factor behind reduced PIPE activity in India. Global geopolitical tensions and market volatility have also impacted both deal-making and fundraising efforts, contributing to the slowdown," says Mukherjee.
IPOs Offer Better Opportunities
With a large number of public issues hitting the markets, institutional investors also have a lot of options, say other experts. The primary markets buzzing with IPOs are also offering much better entry points for investors too.
"There are so many IPO and pre-IPO opportunities that are priced better than PIPE deals. It's natural that informed investors would look at such deals, especially when listed market valuation is at a peak," says Ambareesh Baliga, independent consultant.
As per Prime Database, IPO fundraising as of Sept. 14 has been at Rs 62,668 crore across close to 60 mainboard issues. Moreover, a lot more are in the pipeline, with 17 issues with valid approvals from the market regulator and 49 other issues awaiting approval from the regulator. The flurry of activity in these markets will continue for the foreseeable future, experts say.
"We are confident that the IPO run will continue, supported by several factors like increased domestic capital, a dynamic entrepreneurial environment, and favourable government policies," says Mahavir Lunawat, managing director at Pantomath Capital Advisors. "We believe the IPO market's momentum will persist and the IPO run will remain strong in the foreseeable future."
As primary markets continue to buzz, they will keep eating into PIPE deals, experts believe.
More Exit Options Than Entry Points
Apart from fresh issues taking away investment options, the high valuations are more conducive for exits than entries. "Investors are now shifting their focus towards business model profitability and maximising returns through portfolio exits, rather than pursuing new investments. In 2024, the BFSI sector led exits with 25% of the volume, followed by manufacturing at 17%," says Mukherjee.
In the first half of 2024, PE and VC exit deal values have hit a six-year high, as per data from Bain & Co. "Exit deal values grew by around 40% year on year, from around $9.5 billion in H1 2023 to around $13.3 billion in H1 2024, thus reversing the exit activity tapering that began in H1 2021," says a report by Bain.
Most of these options are provided by the bull run in the stock markets. "In terms of mode of exit, public market sales (primarily through block and bulk trades) emerged as the predominant exit route, accounting for around 55% of all exits (up from around 45% in H1 2023)," the Bain report adds.
Experts say that bulk and block deal action was heavy this year, in addition to 2023, when the bull run began in full swing. Be it strategic investors or promoters, secondary markets are a better and more cost-efficient way to offload stakes as opposed to a PIPE deal.
In a PIPE deal, a large amount of stake is offered to an institutional investor, normally at a discount. In a bull market, it's not necessary as much due to ready buyers and sellers of bulk and block deals.
"This year, fewer PIPE deals happened because fewer opportunities now seem to exist for such investments," Kejriwal sums it up.
Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.
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