Riding on a rise in public offerings and direct sales, secondary sales by financial sponsors have been steadily rising since 2019 and recorded $4.6 billion in calendar year 2022 (CY22). However, this is nearly half of the $10.65 billion secondary sales recorded in CY21.

The total exits by the financial sponsors – private equity and venture capital firms – stood at $16.4 billion in CY22 while it was $35.5 billion in the previous year.

“The reason why India is seeing interest among global PE and VC funds is because the country India has been able to give exits to investors. Exits, not just secondary sales, have picked up significantly over CY20 with a total exit value recorded close to $52 billion combined in CY21 and CY22. In CY21, the exits were primarily driven by IPOs and in CY22 it has been via secondary sale,” Pankaj Kalra, senior executive director at Kotak Mahindra (UK) said.

However, the secondary sales nearly halved from $10.65 billion recorded in CY21, while the total exits for the year stood at $35.5 billion.

The total exits by the financial sponsors – private equity and venture capital firms – stood at $16.4 billion in CY22. The secondary sale as a percentage of total exits was at 21% in CY18 and CY19, 23% in CY20 and 30% in CY21. However, it fell to 28% in CY22, according to Kotak Investment Banking data.

“The reason why India is seeing interest among global PE and VC funds is because the country India has been able to give exits to investors. Exits, not just secondary sales, have picked up significantly over CY20 with a total exit value recorded close to $52 billion combined in CY21 and CY22. In CY21, the exits were primarily driven by IPOs and CY22 it has been via secondary sale,” Pankaj Kalra, Senior Executive Director at Kotak Mahindra (UK) Ltd said.

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“Exit helps to garner more investment and inflows, and in the current year too we see India being able to give decent exits to investors,” Kalra added.

A secondary sale is when a PE firm sells its stake to another PE firm, while exits in general include that through buyback, secondary sales and strategic sale.

The top secondary sale in CY22 included exits by Baring Asia, AION Capital, General Atlantic, Fairfax Holdings, Goldman Sachs and Apax Partners among others (see chart).

“Under the current trend seen in most IPOs, the major chunk of capital raised is in the form of offer for sale (OFS) or secondary stake sale by existing investors including promoters, cashing out in the buoyant markets and creating liquidity in their hands instead of strengthening the balance sheet of the business they are invested in,” Mahesh Singhi, founder & MD at investment banking firm Singhi Advisors said.

“Exit helps to garner more investment and inflows, and in the current year too we see India being able to give decent exits to investors,” Kalra added.

A secondary sale is when a PE firm sells its stake to another PE firm, while exits in general include that through buyback, secondary sales and strategic sale.

The top secondary sale in CY22 included exits by Baring Asia, AION Capital, General Atlantic, Fairfax Holdings, Goldman Sachs and Apax Partners among others.

“Under the current trend seen in most IPOs, the major chunk of capital raised is in the form of offer for sale (OFS) or secondary stake sale by existing investors including promoters, cashing out in the buoyant markets and creating liquidity in their hands instead of strengthening the balance sheet of the business they are invested in,” Mahesh Singhi, founder & MD at investment banking firm Singhi Advisors said.

According to him, this trend is not really healthy for most mid-market or growing companies since the capital raise would only enrich the selling shareholders, giving liquidity in their hands to play in the financial markets while the companies get very little from that pie.

“In addition, this is actually creating a valuation bubble, increasing the value of the same assets and disincentives for the companies in taking additional risk by investing in capital assets, expansion or acquisitions to scale up for future,” Singhi added.

Kenneth Serrao, founder, OAKS AMC said that in 2022, when funding into Indian startups fell 41% year-on-year to $24.3 billion, several startups were forced to raise money at a flat valuation or down rounds. “Remember when there are down rounds, like in 2022, most investors will not want to sell. They’re okay waiting for another year or so to get the returns they eyed. So, depressed valuations dissuade some secondary investors from exiting,” Serrao added.

After a sharp decline in initial public offer activities in 2022, issuances are expected to rise 30% in 2023. In 2021, Indian companies raised $16.5 billion through IPOs, which fell to $7.6 billion in 2022 amidst volatilities in the market.

“There was surplus liquidity available in CY22, and not enough room on cap tables. So, to accommodate some of the inbound interest, existing investors sold shares, that played out in the first quarter of 2022 as well. But investors then turned more cautious which resulted in fewer secondary transactions,” Pankaj Raina, managing director at Zephyr Peacock India said.

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Raina added that in 2021, everyone wanted to participate in secondary markets also because businesses were growing and a rising tide lifts all boats (either a fresh round or existing investors making an exit for new ones). In CY21 people did not care much about the type of shares they got, whether ordinary or not, if they got liquidity preference or not.

“The net internal rate of returns (IRRs) were broadly around 17-21% in CY21, which reduced by about 30% to 12-15% in CY22 – in line with the 30% correction in valuations of new-age companies,” Raina added.

“IPO markets are a lot more uncertain compared to the PE market. In a public market, there is some momentum for few months or quarters and then it suddenly dies down, that uncertainty makes it difficult to time the market especially considering the lead time for companies to do an IPO,” Sunil Thakur, partner at Quadria Capital said.

“So, when one sees that momentum in the market, you’ll see all kinds of companies clamouring on to do an IPO, despite them not being ready from a size, maturity and profile point of view. So, for those kinds of companies it is always good to step up to an IPO through a PE route,” Thakur added.

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