The IPO gamble: The odds seem stacked against investors

Of the 275 initial public offers (IPOs) in India since covid, 35% have delivered negative returns on their issue price. Compared to their listing price, which is the price at which shares start trading, almost half have delivered negative returns. Relative to the BSE 500 return too, half or more have underperformed. Overall, only 36% of IPOs over the past five years have been a worthwhile investment.
Surprisingly, qualified institutional placements (QIPs) fared only marginally better. Of the 224 QIPs since the pandemic, only 99 have outperformed the BSE 500 index, giving these professional investors a success rate of 44%.
Also Read: IPO slump: Stock market indices flashing red shouldn't stop public offers
An analysis at this time is important as the IPO market is stirring again after a recent lull. Why the success rate of IPO investments is poor is not hard to figure.
The transaction is lopsided; a deeply informed and highly motivated seller meets far less informed buyers. The seller is either the promoter of the company going public or an existing private equity investor who is privy to superior information about the company. The buyers, however, even if they are institutional investors, make their investment decisions on the basis of an hour-long presentation (or interaction) and a few ancillary checks with suppliers, customers or bankers at best.
The situation becomes even more lopsided when an army of cheer-leading investment bankers go all out to create a glib slide deck and make the road-show management team cram in all the buzzwords that investors want to hear. Some investors get swayed by rare IPO success stories that begin with: 'Had you invested ₹10,000 in the Infosys IPO…," missing the fact that for every Infosys and Wipro IPO, carcasses of many others lie in their demat accounts. This also misses the fact that hardly any investor stays the course to reap the advertised fruits of capital growth.
An additional dynamic in the recent IPO cycle has been that of private equity sellers. Earlier, new money raised was either invested in the company (in case of a primary issuance) or went to promoters selling some of their stake. Now, many IPOs involve a private equity firm making an exit. Of the 275 IPOs mentioned earlier, 101 had a private equity owner selling its stake (PE-IPOs). The success rate of these is worse, at 30%.
Also Read: Vivek Kaul: IPOs aren't raising much capital for new ventures
Apart from the fact that PE-IPOs seem to be finely priced, note that the money so raised is not invested in the company. In most cases, it is repatriated to the home country of the PE fund.
This trend has been evident in India's foreign direct investment (FDI) data. In 2023-24, while gross FDI was $75 billion, net FDI was barely $10 billion. The gap was partly explained by the repatriation of almost $45 billion by foreign entities. The data for 2024-25 shows much weaker net FDI, with repatriation playing a major role.
Numbers from a recent Bain & Company report suggest that in 2024, almost $20 billion was sent out by private equity firms that had cashed out in public markets. This does not include multinational firms like Hyundai listing their local units and sending back the share-sale proceeds.
This trend of large repatriations has picked up in the last five years. It is likely to continue and even accelerate as PE players are under pressure to sell their investments. Those whose money is deployed seem to be displaying some impatience.
A recent article in the Financial Times quoting a Bain & Company report stated that distributions as a proportion of net asset value for private equity had fallen from an average of 29% between 2014 and 2017 to just 11% last year. India is one of the few bright spots in an otherwise limp global IPO market. It is therefore not surprising that PEs want to tap our domestic liquidity to book profits.
Also Read: The IPO frenzy isn't a sign of a robust stock market
The value of unsold PE stakes in listed companies in India could broadly be in the range of $25-30 billion. The bigger source of equity supply for public markets would be in the form PE-owned unlisted firms that are looking to hit the IPO market.
While it is hard to get an exact estimate, the apex body for private equity and alternate assets in India, IVCA, claims to represent $350 billion of assets under management in India. This would include investments in physical assets and credit, but it is fair to assume that a significant amount of it would be in the form of equity.
This PE-led supply will likely keep a lid on market prices. There is no single all-encompassing answer to whether public markets should provide PE investments with an exit path. But when considering whether to apply for the next IPO, it would be worthwhile to remember the odds of success.
These are the author's personal views.
The author is the managing partner at Breakout Capital.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

Time of India

4 hours ago

• Time of India

Infosys founder Narayana Murthy on why he sees no difference between management and technology graduates

Infosys co-founder NR Narayana Murthy has emphasized that management and technology graduates are equally valuable in an AI-driven world, arguing that both disciplines tackle problems at different but complementary levels rather than competing with each other. In his conversation with MoneyControl, the tech veteran dismissed any hierarchy between the two fields, stating that artificial intelligence creates opportunities for both streams of professionals. "I do not see any difference between a management graduate and a technology graduate because they attack the problem at different levels," Murthy explained. Different approaches, shared goals in problem-solving The 78-year-old industry pioneer outlined the distinct yet interconnected roles each group plays in organizational success. "One asks 'what,' while the other focuses on 'how.' Technical people look at 'how,' and the management graduates look at 'what,'" he clarified, highlighting how both perspectives are essential for comprehensive problem-solving. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Buy Brass Idols - Handmade Brass Statues for Home & Gifting Luxeartisanship Buy Now Undo Murthy positioned AI as the great equalizer that enhances capabilities across disciplines rather than favoring one over another. "AI is primarily a technological marvel. It is all about improving productivity. It is all about solving problems that are beyond human effort," he noted, suggesting that both management and technical professionals can leverage AI to amplify their respective strengths. Optimistic outlook for India's brightest minds The Infosys founder expressed strong confidence in India's educational output, regardless of specialization. "So, both are needed. And given that these are some of the brightest people that we have in the country, I am very, very positive," Murthy stated, reflecting his belief that the country's talent pool spans across multiple disciplines. His comments come at a time when debates about the relative value of different educational backgrounds intensify amid rapid technological advancement, with Murthy's perspective offering a more inclusive view of professional competencies in the modern workplace. AI Masterclass for Students. Upskill Young Ones Today!– Join Now

Economic Times

15 hours ago

• Economic Times

A Tale of Yaay! and Hmm: Is India's growth story impressive, or disappointing — or a bit of both?

Purchasing power, stop running away! We're doing fine! India has become the world's 5th-largest economy, eclipsing former economic giants like Britain. In a matter of 1-2 years, it should be the 4th-largest, surpassing Japan. Post-pandemic economic growth is nothing to be scoffed at. India is the world's fastest-growing major economy. Over the past 3 years, a rather turbulent period for the world economy, India's GDP increased at nearly 8% definitely. Yet, is the rising euphoria on India's escalating economic ranking justified? Perhaps. But only after we acknowledge the statistical meaning of being among the world's top-ranked economies. India is the world most populous country. In per-capita terms, we are still ranked as low middle-income. In per-capita nominal GDP, India is 143rd in a ranking of 194 countries. Adjusting for purchasing power parity (PPP), it's at 125th - the rank going up a few notches, but not very much. Humbling, yes. But let's not minimise the importance of being among the top 5 economies in overall GDP. China is 69th in nominal per-capital GDP, and 72nd in PPP per-capita GDP. Yet, its influence on the world stage is not diminished by its per-capita income ranking. China's economic and strategic influence is next to none, other than the US', and sometimes even an example, while most nations have cowed into pleasing Donald Trump and accepted his trade deals, China has decided to fight - and appears to be winning. Many countries are weighing whether they should develop closer alliances with China or the US, and how the others will India's influence will also be measured by its overall ranking in GDP, and not just by its per-capita ranking. Yet, let's keep in view that gap between India and the top two world economies. The US economy is $30 tn in nominal GDP. The Chinese economy is $19 tn. India's is far, far below at $3.9 tn. Humbling, vs expectations: that's the other aspect of India's growth story. In 2018, GoI pledged that India would be a $5 tn economy by 2025. This was a target that many experts viewed with amused scepticism. Of course, progress was halted by the two years of the pandemic. But for those long waiting for the arrival of the $5 tn economy, it's still disappointing to see that we are just halfway towards the 2018-19, India's GDP was $2.8 tn. In 2024-25, it's still $1.1 tn short of the target. Now we hope to achieve that target by of leading sectors - where the world acknowledges India's influence - also brings a mixed tale of optimism and caution. India is the world's largest user of ChatGPT, and, according to a Microsoft, Bain & Company, and Internet and Mobile Association of India (IAMAI) report, home to 16% of the world's AI talent. Impressive, has the ambition to lead the world in AI and Narendra Modi says, 'AI will remain incomplete without India.' Yet, so far, India doesn't have an indigenous foundational language model, and it's 3-5 years away from developing domestic AI chips. It lags substantially behind other nations in attracting investment in by Stanford University researchers suggest that India received only $1.2 bn in private investment in AI. Of course, the US received the lion's share - $109 bn. But China received 7x than India. A recent article in The Economist asks whether India can be an AI winner. It cautiously concludes that it has a lot to do to lead the most-talked-about achievement on the manufacturing front is that Apple is now assembling 20% of its smartphones sold worldwide in India. By 2026, it is planning to assemble in India all smartphones it will sell in the US. Again, impressive. Yet, the humbling reality is that India is simply assembling the phones, with almost all of their parts being manufactured in China or Southeast Asia. Hopefully, this will change once Foxconn, Apple's top supplier, sets up production facilities in biggest propeller for future economic growth is investment in Rundefined the US 3.5% of its even-larger in sectors where India has emerged as a top global supplier, investment in R&D is pathetic. India often labels itself the 'pharmacy of the world'. Indian pharma supplies 20% of all generic drugs globally, and 40% of generic drugs used in the US. Generic drugs do not need R& the non-generic sector is substantially driven by R&D. According to the Journal of Medicinal Chemistry, in pharmaceuticals, China's R&D investment is 16x India's. India imports 70% of its drug ingredients from China. Clearly, in some sense, we are far behind China even in sectors where we have a major global presence. (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. How Vedanta's Anil Agarwal bettered Warren Buffett in returns Rivers are moving more goods than before. But why aren't they making a splash yet? Why Infy's Parekh takes home more than TCS' CEO despite being smaller Is India ready to hit the aspirational 8% growth mark? Aadit Palicha on Zepto dark store raid, dark patterns, and IPO Stock Radar: MCX rallies over 50% in just 3 months to hit fresh highs! What should investors do in June – buy or book profits? Metal stocks: Candidates for tactical and contrarian investing? 6 metal stocks with an upside potential of up to 39% Weekly Top Picks: These stocks scored 10 on 10 on Stock Reports Plus

Economic Times

17 hours ago

• Economic Times

Accenture shares tank 11% despite beating Q3 revenue estimates. Infosys ADRs fall 3%

Accenture reported revenue of $17.7 billion for the quarter ended May 31, compared with the analysts' average estimate of $17.30 billion. Accenture's shares plummeted despite exceeding third-quarter revenue expectations, driven by AI-related service demand. The company faces challenges from reduced U.S. federal contracts. Consequently, Indian IT ADRs like Infosys also declined, while domestic IT stocks showed mixed performance, with gains in tier-2 companies and HCL Technologies, contrasting with losses in Infosys and LTIMindtree. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Accenture shares fell 11% on Friday, hitting the day's low of $273.19, notwithstanding a revenue beat for third quarter driven by growing demand for the consulting giant's AI-driven services from enterprise reported revenue of $17.7 billion for the quarter ended May 31, compared with analysts' average estimate of $17.30 billion, Reuters reported, citing data compiled by company is grappling with a weak U.S. federal contracting environment as the Trump administration has slowed new contracts and cut existing agreements in a bid to reduce federal spending, the report said, adding that the company said these changes have not had a material impact on its operations or financial indices on Wall Street were trading mixed, with the Dow 30 at 42,225.90, up 54.23 points or 0.13%. The S&P 500 was down 9.35 points or 0.16%, while the Nasdaq Composite traded at 19,464.10, down 82.13 points or 0.42%, around 12:23 PM GMT-4 (9:54 PM IST).Taking cues, the American Depository Receipts (ADRs) of India's frontline IT companies, Infosys and Wipro , were also down. While Infosys ADRs were down 3% to hit the day's lows of $17.89, Wipro ADRs were marginally down at 0.33%.Indian headline indices ended their three-session losing streak on Friday, led by bank, energy and IT stocks. Individually, HDFC Bank and Reliance Industries (RIL) contributed the most. While Nifty gained 319.15 points or 1.29% to close at 25,112.40, the 30-stock S&P BSE Sensex finished at 82,408.17, rising by 1,046.30 points or 1.29%.Indian IT stocks today ended with strong gains, with tier-2 stocks taking the lead. Persistent Systems jumped 3.5% and was followed by Coforge , which rallied 2%. Mphasis was also up by over 1% at the closing largecap stocks, HCL Technologies was the top gainer, rising by 1.3%.Others, including Oracle Financial Services Software (OFSS), Tech Mahindra Tata Consultancy Services (TCS) and Wipro, settled with gains up to 0.8%.Among laggards were Infosys and LTIMindtree, which closed in the 10-stock Nifty IT index ended with an uptick of 0.84%.