Are secondary markets in emerging markets becoming more effective exit vehicles?

One of the favourite strategies of private equity (PE) investors for exiting the market is an initial public offering (IPO). IPOs enable private investors to realise their invested money. Privately held companies often need to inject funds, which they could obtain by taking a company public. Sometimes, investors wish to exit such companies and park their funds in other companies with better opportunities. In such instances, IPOs help companies make an exit.

However, IPO subscription can be a challenge, especially for companies launching IPOs in developing markets. The global IPO market has slowed due to a reduction in deals and poor valuation and subscription. It is essential that investor participation be increased to enhance IPO subscription. Investor participation in the stock market is low, primarily in developing countries, leading to plummeting IPO subscription. Figure 1 highlights that investor participation is as high as 50% of the population in developed countries such as the US, whereas in India and other developing countries, very small portions of the population invest in stock markets.

Investor participation is growing very slowly, almost static

Despite broker companies coming up with zero broker fees, and the advancement in technology, de-mat accounts can be opened from the convenience of one’s home. The number of de-mat accounts open has increased in the past five years, driven by increased awareness of financial stability, progress in social security and better decision making. Higher equity returns have fuelled investor interest, prompting a shift away from savings account deposits to equity markets, but growth in the number of investors remains small.

Factors impacting participation

  • Financial knowledge: An understanding of simple components such as interest rates, compounding, and returns. Most do not have an in-depth understanding of company fundamentals and are, therefore, not able to assess a company’s true financial position; this leads to scepticism and often demotivates them from investing in the stock market.

For PE firms to take their portfolio public, it is crucial that they understand their targeted secondary markets and understand the investment awareness and proficiencies of investing public. After assessing the suave nature of investors, retail and institutional both, a firm can garner more confidence to navigate the pitfalls of going public. This shall also help to devise plans and strategies to increase awareness for their IPO, inspire right promotional approaches, and disperse information as to minimise information gap between potential investors and the IPO issuing company. These considerations, along with other factors like macro conditions and regulatory compliances, are likely helpful in creating right conditions for a successful IPO with higher subscription.

How Acuity Knowledge Partners can help

Acuity’s PE practice offers a range of strategy support services to PE firms and assist them in their entire investment life cycle including exits. We have been assisting PE firms worldwide for past two decades, with a strong pool of experienced skilled professionals.

About the Author

Harshika is a professional in finance. She works in the research and consulting department of Acuity Knowledge Partners and enjoys reading and writing.

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.