When it is very easy for companies to raise capital, it is also the best time for investors to take out capital. The excessive liquidity sloshing all over a sector or theme makes it possible to both raise capital as well as release capital. What we are seeing in our market is both trends playing out simultaneously.
Large venture capitalists are selling out of their pre-IPO holdings in multiple companies which became unicorns and got listed on our bourses. Large private equity investors are also pushing companies, where they are already invested, to go public and enable them to sell their shares in the OFS or thereafter on listing.
The urgency to exit companies in which they are stuck is palpable in multiple marquee firms and very visibly so. However, this urgency is seeing a matching eagerness among domestic institutions and high net-worth investors to accumulate holdings in the same companies using the VC/PE selling as an opportunity. That makes for a very liquid market in new-age companies and firms that are in sun rise industries. But the jury is still out on which of these two sides will end up looking smarter.
Investors sitting on the sidelines watching this duel are wondering and speculating on who is right among these two sides. This is not just an academic exercise. This is an ideological division between the value school that feels the froth in these companies is too high and the growth school that feels that new-age companies deserve to be valued differently.
The truth is there are no easy answers. But one thing must be remembered. Investors with large holdings must not waste an opportunity offered by a very liquid market to exit illiquid stocks where they hold significant positions. They can only sell adequately when there are buyers. When the liquidity runs out, it would be impossible to sell. Also, when the liquidity runs out, valuations will have to inevitably moderate gradually. Selling into a falling market would be a nightmare for large investors and they would rather risk selling early than trying to sell too late.
The only unanswered question right now is “ How long will this liquidity-driven market last?” If only we knew the right answer!
