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Is the IPO boom Helping Capital Formation?
Aug 5, 2016

Initial public offering or IPOs have created a lot of buzz in 2016. Listing gains and over subscription of issues have caught investors' interest. The IPO market is still on swing as many more IPOs are lined up. But are investors really aware where the capital thus raised is going?

As suggested by the chart of the day, most of the capital raised is not being invested in the business. Instead it is providing promoters and early stage investors an exit route. The trend has been more pronounced during the last few years. The IPOs have become more of an exit route for funds and early stage investors of late.

According to the data as reported in Mint, approx. two-thirds of the money raised through IPOs in 2016 have been offer for sale. Just one third of it was towards capital expansion.

It's a common knowledge that fund raising is more to do with the markets, rather the need in the business. The interest in IPOs always heightens when there is a bull run... a perfect time for PEs and early investors to exit.

But what works well for them may not always be in IPO investors' best interests. As such, it is extremely important that investors do not get carried away by IPO frenzy and focus on fundamentals, management quality. Of course last but not the least - valuations.

We always remind readers of the most insightful quote from Warren Buffett on IPOs...

    It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).

Data Source: Mint, Prime Database
Note: Data only for IPOs, PSUs and follow on public offer excluded

This Chart Of The Day was published in The 5 Minute WrapUp - When Will You Start Owning Sensex 2030 Stocks?

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