Homegrown funds go full blast at IPO party

India's IPO pipeline has remained strong this year, putting it on course to reach the record set in 2024. A generation of successful young companies is entering the market as private equity seeks a profitable exit, and swelling ranks of domestic investors have a big appetite for such paper. There are two structural shifts here. The range of companies listing has widened appreciably beyond technology firms, which makes the supply of paper less vulnerable to sectoral shocks. The second shift is the flipped role of foreign investors, who are sitting out the party due to rich valuations. Domestic investors are not as sensitive to valuation and are driving interest in IPOs.

India has had a fairly evolved private investment ecosystem for a while now, and it is providing venture capital with the liquidity support needed for exit. Foreign investors, too, are rotating capital between the primary and secondary markets. Domestic investors are creating greater mobility for foreign capital by adding depth to both segments. Domestic capital has nowhere to go, so liquidity is sustainable. This supports valuations and draws more companies into the primary market.

India offers stable and high growth, which apparently justifies its IPO valuations. Investors aren't complaining, although the secondary market is underperforming its global counterparts amid the IPO boom. Domestic investors have not been able to counteract selling by foreign investors, as India is engulfed by geopolitical and trade uncertainty. This could act as a drag on IPO market sentiment, which has been largely price-agnostic. But it is not doing that because domestic institutions are acting in concert with retail investors to extend the IPO boom. The secondary market is in a squeeze, with foreign investors turning skittish over global uncertainty and IPOs drawing an inordinate amount of interest among domestic investors. India's equity market will need to strike a balance within this framework. The implied secondary market de-rating still needs to be corrected.