Asset Management

Growing interconnectedness of India's public and private financial ecosystems

October 2024

Read Time: 3 minutes

"The market whispers its own narrative while economists shout their forecasts." – Anonymous

The Indian economy and specifically the Indian markets continue to script their own destiny. News on the economic front continues to demonstrate resilience amidst global headwinds,  with GDP growth reaching 6.8%1 in the last quarter. This robust performance is underpinned by strong domestic consumption (up 7.2%  yoy1) and renewed focus on public infrastructure spending (up 18%2 qoq with the lifting of election-related restrictions). Growth in both the manufacturing sector (up 6.5%3) and the services sector (up 7.7%3), reflect the economy's broad-based growth. All eyes continue to be on the imminent Fed rate cuts and RBI’s reaction as domestic inflation moderated to 4.8%.

These tailwinds coupled with seemingly never-ending domestic liquidity are propelling public markets new highs. While the post-Covid rally has been driven by domestic capital, we are now witnessing Foreign Portfolio Investors (FPIs) turn net buyers, injecting over USD 12.5 billion4 into Indian equities in the past quarter, a stark reversal from the USD 2.8 billion outflows seen in the previous quarter. Booming public markets have given an opportunity for record public equity issuances with over 80+ IPOs in this quarter alone. If the market continues to hold, 2024 is likely to be one of the most active years for companies going public. A rising tide lifts all boats – that adage couldn’t have fit better for primary issuances. They continue to attract disproportionate interest as almost all the IPOs in 2024 have delivered attractive returns to investors. The sustainability of returns over the mid-long term for some of these issuances though is debatable.

In this environment, private markets come off as the proverbial poorer cousins. Several private companies have opted out of doing private financing rounds and have accelerated their IPO plans. Most of the activity in the private markets today is concentrated on the ‘pre-IPO’ market with several large companies doing secondary transactions prior to a listing. These issuances are being priced on a potential listing price which is benchmarked against its public market comparable. The total value of pre-IPO placements reached USD 1.2 billion5 in the last quarter, a 40% jump from the previous quarter. Apart from institutional investors, such placements are now targeting family offices and HNIs as well. Many investors are turning to the unlisted space in search of better entry points, highlighting the growing interconnectedness of India's public and private financial ecosystems. At these times, most funds have focused on monetising their investments wherein they were seeking exits. Consequently, several IPOs are offers for sale (‘OFS’) by funds and the momentum and quantum of block deals by funds too has witnessed an all-time high. Fresh investments though have become very difficult if pricing discipline has to be maintained.

In a strong market where stock picking can yield impressive returns and most stocks seem to perform well, it's easy to question the need for diversified portfolios and disciplined and consistent fund managers. However, these elements are critical for long-term investment success across market cycles. An appropriately diversified portfolio helps avoid over exposure and instead manages risk by spreading exposure across various asset classes, sectors, and strategies, safeguarding against an unexpected downturn in any single area. This is invaluable when market conditions shift, by maintaining stability in the portfolio and in some situations even preserving capital.

Author: Ritesh Chandra, Managing Partner, Avendus Future Leaders Fund

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