Understand the difference between IPO and Private Equity
Private Equity and Initial Public Offering (IPO) are both methods of raising funds for companies, but they operate in different stages of a company's lifecycle and involve different processes and implications. Private Equity is generally looked forward to during the growth and expansion stage while an IPO is feasible when a company is mature enough to meet the regulatory requirements and has a strong financial track record. Let’s understand in detail about both of them.
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Parameters |
SME IPO |
Private Equity (PE) |
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Meaning |
SME IPO is a means to raise funds by making a company public through sale of its shares. Its two way as it results in listing of a company and also raise funds for the company at the same time. |
It is a means to raise funds through a set class of investors that invests and acquire a % of ownership in an unlisted private limited company. |
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Investors |
IPO involves a wider pool of investors. Investors range from mutual fund houses, family managed funds which represents QIBs and to general public. |
A private equity investor may be one or two who acquire a stake in the company in return for investing capital in the company. |
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Valuations |
The Valuations are a multiple of Profit after taxes and the Price to earnings ratio applicable to the sector. There is no post Investment valuation. |
The Valuations in a Private Equity Investment could be based on multiple factors like EBITDA, revenues, customer base or asset base. Private equity firms continue to monitor and reassess the valuation of their portfolio companies throughout the investment holding period. Sometimes, Valuations may be higher under PE. |
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Participation in decision making |
Decision making remains with the Promoters. IPOs do not involve any transfer of control to new investors as seen in the private equity transactions. |
Private Equity Investors take a more active role in management and other operational and strategic decision making. |
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Participation in Board of Directors Composition |
There is no such requirement and promoters continue to be Directors. |
Usually, private equity investors appoints Director on Board to observe and participate in business decisions. |
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Benefits |
Listing results in Brand recognition, Visibility of the company and improves its access to capital at reasonable terms. Listing results in increased credibility of the company. |
A private company funded and ownership diluted through private investors doesn't get visibility or recognition. The company remains privately held. |
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Exit strategy |
No pressure regarding an exit strategy exists. |
The private equity investor aims to exit after a certain time period (3-4years) usually by selling to another investor. They generally look for OFS in IPO. |
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Rate of return for investors |
Internal rate of return varies between 15-20% for Investors. |
Internal rate of return could go up to 25% for investors. |
Conclusion
Both Private Equity and SME IPOs provide companies with essential capital, but their structures and outcomes differ significantly. Private Equity is ideal for companies in the growth stage, as it offers capital along with strategic guidance, though it involves a partial transfer of control. SME IPOs, however, are suited to mature companies looking to raise funds from the public while increasing brand visibility and credibility without losing control. While IPOs yield lower returns compared to Private Equity, they offer long-term value and broader access to capital. Companies should choose based on their growth stage, funding needs, and strategic goals.
What role does IPO Advisors play in successful IPO?
IPO Advisors play an important role in successful launch of an IPO. Their advisory role from IPO readiness, selecting the best merchant banker in India for SME IPO, various due diligence activities and IPO valuation guides the company throughout the IPO Issue and listing process. IPO platform in India provides information on upcoming IPOs on NSE Emerge and BSE SME and list of merchant bankers and anchor investors. Role of IPO advisor is important in the success of the listings.
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