Entrepreneurs need to leave money on the Table

A disturbing scenario has consistently been taking place when promoters and PE investors, together, with the bankers, drive the IPO price up when selling the dream. The juice is totally sucked out of the company by pricing the IPO ridiculously high

Luis Miranda
Updated: Dec 12, 2012 10:00:47 AM UTC

Luis Miranda connects dots. He started investing in India's infrastructure a long, long time ago. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank. Luis has invested in and has been on the boards of companies like GMR Infrastructure, L&T Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, and Manipal Global Education. Luis today spends most of his time, together with his wife, on non-profits. He is Chairman of CORO and Centre for Civil Society and Managing Trustee for Collective Good Foundation. Other organisations include Take Charge, 17000 Ft Foundation, SNEHA, Sunbird Trust, Operation ASHA and Educate Girls. Luis graduated with an MBA from Chicago Booth and is a Chartered Accountant.

A couple of weeks back Tamal Bandyopadhyay released his first book, ‘A Bank for the Buck’. It is the story about HDFC Bank, India’s most valuable bank. I am proud to have been associated with HDFC Bank, being part of  Aditya Puri’s ‘dirty dozen’ that started it in 1995. Our daughter, Mihika, is thrilled since Chapter 4 is titled ‘There’s a Baby on the Trading Floor!’ and it talks about how we had to baby-proof the dealing room since she would spend Saturdays with me at office.

I had forgotten some of the stories that Tamal has narrated, but one that I never forgot was to do with the pricing of our IPO. The IPO was to be at par and most of us ‘smart’ bankers felt we should have a small premium. Deepak Parekh, the Chairman of HDFC, told us, “Leave some money on the table. Investors will reward you in the future for doing so.” We thought he was being too conservative, but Deepak had the last laugh, since the stock has done exceedingly well with a CAGR of 39% for the past 17 years. Maybe, as I learnt from the book, Deepak was worried that he would see a repeat of the near-disastrous HDFC IPO. This was possibly the only capital markets lesson I learnt during my sales and trading career.

At IDFC Private Equity we have taken 4 of our portfolio companies public. And at all of these 4 IPOs we battled, with varying degrees of intensity, with the promoters, management teams and the bankers on the pricing of the IPO. And our constant position was “Price the IPO attractively. Leave money for promoters / sponsors and get the promoters excited (the fact that the execution team would then spend their time dragging down the price could be the topic for another blog!). It happened every time. And promoters have always told us (not at the time of the IPO, but many months later) that this conservative approach actually helped their share price in the long term. A little hit in dilution upfront of 1% could pay handsome dividends over time on the balance 90%. And this is something that promoters just don’t get. Once a stock is hammered after an IPO it becomes very difficult to recover.

A disturbing scenario has consistently been taking place when promoters and PE investors, together, with the bankers, drive the IPO price up when selling the dream. The juice is totally sucked out of the company by pricing the IPO ridiculously high. Some of the existing investors may exit at that stage than barely 6 months back. Retail investors get dumped with this junk.

I have mentioned in an earlier blog about how companies get destroyed when PE investors come in at a high valuation – if it’s a straight equity deal, the PE investor makes the promoter’s and management’s  life miserable and if it is a convertible the promoter runs the risk of being significantly diluted if the company under performs.

Thanks to all of you who have commented on my earlier blogs. One of the comments was that bad investments kill a sector. In the same manner, poorly performing IPOs also kill the IPO market. So remember Deepak Parekh’s simple message 17 years back - “Leave some money on the table.”

(I look forward to having an online discussion on these issues – so please continue to write in with your comments.  I spent over a decade in the private equity industry and enjoyed the excitement of working with great colleagues and partnering exceptionally brilliant entrepreneurs to build India’s infrastructure. We had a great ride, but sometimes we got it wrong! I am now experimenting to see how we can transfer the lessons I learnt, and did not learn, in the for-profit world to the incredibly  passionate and brilliant social entrepreneurs I now hang out with; the aim is to build sustainable organisations without destroying the soul of their NGOs)

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