Venture capitalists, keen to exit their investments in India, would prefer to do so via initial public offerings (IPOs) than rush an exit through other route like mergers and acquisitions (M&As). VCs not facing pressure from investors are willing to wait longer and put in more money, if required.
VCs say while exit through an IPO is ruled out this year, there are limited options of a strategic M&A and IPOs get better value.
“For VCs which have invested in technology space, M&A was never a lucrative exit option. Besides, large-scale M&A activity is limited. IPO was the only viable exit option and that, too, seems to have dried. Lots of funds are digging in their heels and helping portfolio companies,” said Pradeep Tagare, director, Intel Capital, India.
This is especially true for companies that raised funds around 2005. These are now at a point where they are IPO-ready. “From a return perspective, IPO is a better option than M&A,” said Tagare. In the case of Intel Capital, the fund will soon announce follow-on investments for four portfolio firms this year.
According to data from Venture Intelligence, exits through IPO give investors better value than a strategic deal. Year 2010 saw five VC-backed IPOs raising $607 million; in the same year, there were 28 exits via the M&A route for $255 million. But with IPOs drying up, 2012 has seen eight exits via the M&A route, raising $84 million.
VCs may like IPOs but these are not easy in India. Unlike in the US, the IPO window for a firm in India is much longer. Firms going public need to be profitable, which increases the gestation period for a listing. Taking a cue from travel firm Make My Trip’s IPO on the Nasdaq, several firms are thinking of listing on international bourses. Besides, invest-ors in these markets understand the internet industry better than investors in India.
“There are four-five companies in India that are looking for an IPO on Nasdaq but it is not easy. You need to have a holding company in the US before listing,” said Tagare.
Many VC funds are still comfortable holding on to investments rather than rush for an exit. Alok Mittal, MD, Cannan Partners India, feels exit via an IPO in 2012 will be difficult. “Some of the companies in our portfolio are looking for an IPO. Considering the market, we would rather wait for a right opportunity. More, the funds through which we have invested from have the capability to stay invested, not only for this year but for a few more years,” he added.
Niren Shah, managing partner, Norwest Venture Partners, believes IPOs give better value compared to a strategic deal. “Norwest is a long-term fund; it has a 10-year life. We would prefer to and are willing to invest and build significant-sized companies and take them to listing. At the same time, we are open to a strategic sale as well, provided valuations are reasonable and the management has a belief that it is a good fit for them. From an industry perspective, I think IPOs are a preferred route,” he added.