CHENNAI: listing on a stock of exchange and going through an initial public offering (IPO) might be a more glorified way of raising funds. But, a study released on Monday showed that in the six years between 2011 and 2016, private equity (PE) and venture capital (VC) firms have invested over $72 billion in Indian companies -- nearly 6.6 times more than what was raised by firms through IPOs.
The study, the result of collaboration between Indian Institute of Technology-Madras’ Prof. Thillai Rajan A, Department of Management Studies, and PE-Research firm Venture Intelligence, also records that not only is the quantum of funds raised through private equity and venture capital significantly higher, its rate of growth is also much faster.
“The growth rate in PE-VC funding has also outstripped that of the IPO markets. For example, the compounded annual growth rate (CAGR) of capital raised from IPOs during the period 2011-16 was eight per cent, whereas the CAGR of PE-VC investments was 14.9 per cent,” the report pointed out.
While only firms that have reached a certain size and scale are able to reach PE/VC markets, the government is implementing various initiatives like SME exchange and trading platforms. PE-backed firms also showcased other outlier qualities to those that are listed and funded by others means. Revenue growth of PE-VC backed companies was more than twice that of other benchmarks used in this research.
“PE-VC firms invest in those firms that have high potential for growth. While smaller companies are likely to clock higher growth rates as compared to the larger firms, the growth spread between PE-VC funded companies and benchmarks is considerable,” the report notes.
One criteria where PE-backed firms faltered were in making profits. The average annual growth rate of profits for PE-VC funded companies was the lowest across all sections surveyed, at (-)73 per cent.