What is driving the fund-raising market in India? Are we witnessing any new trend in the type of investors entering the Indian markets?
Investors, especially retail investors, have made good listing gains in FY21, which is the sole reason for driving interest in the Indian fundraising market. There was also much belief among foreign portfolio investors (FPIs) in Indian economy’s positive trajectory as well as corporate India. Historically, Asian and Indian funds have been dominant in India, but this time capital flow is coming from newer geographies. Last year, some high-quality emerging market funds from Europe actively started taking part in initial public offerings (IPOs). We are also seeing some of the sovereign wealth funds from Asia and Canada getting more active and investing in mid-cap IPOs, compared to large caps earlier. Another exciting change is that now hedge funds have opened their long-only books to invest in Indian IPOs.
What is the flavour of these investors? What type of companies are they looking to invest in?
Overall, the mood remains optimistic toward India and Indian paper, notwithstanding the near-term second wave of Covid cases and IPO fatigue. This is a temporary phase, and once there is a little more control on the Covid side, the markets will come back a little more resilient. In our conversations with clients — both private equity investors and corporates, we find reasonable optimism about deal-making. There is optimism that Indian markets have the incredible architecture to allow them to list or do M&A deals. FPIs liked investing in leaders and growth companies where there is profitability. They have not shown interest in companies with huge leverage. The focus continues to be on return on equity (ROE) and return on capital employed (ROCE).
How will you sum up FY21 for the entire deal market including ECM and M&A?
Last year when the Covid-19 pandemic hit India and the rest of the world, everyone considered it the doomsday; but it was the best year in the last decade for investment banking, particularly fundraising. The year ended on a solid note with close to Rs 2.29 lakh crore ($32 billion) raised in FY2021 through 120 deals, as against Rs 1.45 lakh crore ($20 billion) FY2020 through 65 deals. Similarly, the total M&A and private equity advisory deal value stood at Rs 8.8 lakh crore ($121.8 billion) compared to Rs 7 lakh crore ($98.3 billion). Kotak Investment Banking topped the ECM segment in FY21 with an overall 64% market share and continued to dominate the M&A and advisory space.
Going forward, how do you see the deal pipeline?
We understand that new-age companies IPO in the offerings. FY2022 is likely to be dominated by listings of new-age tech companies. The pipeline is quite strong, and we have seen good interest from investors to invest in these companies. We have already seen some announcements of pre-IPOs and expect the new-age tech company IPOs to be taken up by investors strongly. Newer sectors like speciality chemicals, agrichemicals, and exciting companies in the consumer space make it quite attractive for investors to engage. Our conversations with clients and investors show that there will be reasonable interest in participating in some of these offerings.
Last but not least, the financial services companies will continue to dominate the IPO space. We may also see some exciting and large names that have remained unlisted over the past many decades are now finding it worthwhile to consider listing. They have realised that the way to build sustainable wealth is through a listing in the Indian Capital Market. Apart from new-age tech companies, we are looking forward to listing Life Insurance Corporation of India (LIC). LIC IPO will be a game-changer for the country. It will be national pride, something that will occupy the mind share of the country and investors.
What are the trends emerging in the M&A space?
Financial sponsors dominate the M&A segment. We have now started seeing selectively foreign strategies coming into India. While some domestic IT and technology companies have made acquisitions abroad, these deals sizes are modest. For the first time in 15 years, it is interesting to note that financial sponsors are active in all parts of the value chain — seed and venture funding, growth stage, late-stage, distress assets, pre-IPO and control deals. Some of the financial sponsors and foreign strategists we talked to, have been motivated by the pace of regulatory changes to invest in India.
The average deal sizes are going up. Is there more risk appetite among the investor community for some of these newer assets?
The average deal sizes have kept moving up. Investors generally like large companies where they can take part. The impact cost is less, and if these companies do well, they will have the ability to get into various indices over time. We also notice that companies are now looking at much larger floats than they were before. My judgement is average IPO sizes for new listings will move up from Rs 1,000 crore in the future, and average M&A deal sizes will continue to keep increasing as businesses scale up.
