Listed Space Set To Change as Unicorns Go Public: Goldman Sachs
Moneylife Digital Team 20 September 2021
The number of ‘unicorns’ has surged in India in recent years, enabled by the rise of the internet ecosystem, availability of private capital and favourable regulatory environment. This year, the amount of money raised through initial public offerings (IPOs) has reached the equivalent of US$10 billion, surpassing the issuance in the past three years. "The IPO pipeline is expected to remain robust over the next 12-24 months, based on recent announcements from ‘new economy’ unicorns and our objective framework for estimating new listings," says a research note.
In the report, Goldman Sachs says, “In our base case estimate, we assume about half of the unicorns and firms with at least $100 million revenues list over the next two-three years, along with companies that have already announced IPOs. We assume a listing premium of 15% over the offer price, in line with the long-term average since 2004 and slightly lower than the premium for the past two years. Based on these assumptions, nearly $400 billion of the market cap could be added from new listings over the next two-three years — this could be conservative given the rapid pace of IPO announcements and the substantial valuation premiums commanded by recent tech IPOs.”
Over the past three years, Indian companies and start-ups have raised $35 billion-$40 billion annually via private equity (PE) of venture capital (VC) deals, which has exceeded the funds raised by Indian corporates through public market issuance. This year alone, about $43 billion of funds has been raised to date via private equity deals, with about 70% of deals (by number) and 60% of deals (by value) cconcentrated in the information technology (IT) and info-tech-enabled services (ITES) sector.
The rise in private funding, coupled with the development of the digital ecosystem, has helped start-ups grow and rapidly gain scale. Consequently, the number of companies with a valuation above $1 billion, commonly referred to as ‘unicorns’, has quickly risen. An estimated 67 unlisted start-ups have achieved unicorn status in India, with 27 of them hitting the $1 billion valuation mark this year alone. The largest unicorns are primarily from new economy sectors, with about half of them from the fintech, e-commerce and software-as-a-service (Saas) or data management sectors.
At present, India is the seventh-largest equity market by capitalisation among major markets and regions, including the Euro area and the Middle East as regions, with about $3.5 trillion market-cap. “Based on our refreshed estimates, we expect India’s equity market cap could increase significantly over the next two-three years and cross $5 trillion by 2024. Relative to other markets, the estimates suggest India will likely surpass the UK and the Middle East to become the fifth largest market in the next two years,” the report says.
The Indian equity indices have seen relatively little change over the past decade. Most stocks in the Indian front line indices like NIFTY and MSCI India have more than 20 years of listing history, making India among the ‘oldest’ indices in the region. Many of the top stocks in the index today remain the same as they were 10 or 20 years ago. 
However, Goldman Sachs sees index transformation over the next few years. “...we think Indian equity indices could see a larger representation of the new-economy sectors over the next two-three years as the large digital IPOs get included in the index. Based on our pro-forma calculations, assuming 50% of the market cap increase from listings gets added as float capitalisation, we see the new-economy sector weight could rise from the current 5% to 12% and further to 16% in case of full inclusion.” 
“Sectorally, consumer discretionary, which includes e-commerce and internet retail segments and communication services like internet and media could see the largest increase in weights at the expense of the commodity and old-tech. Furthermore, the private unicorns and the potential digital IPOs have been delivering significantly higher revenue growth than the traditional public equity indices, suggesting the compositional shifts could make the index grow faster in the future,” it added.
Goldman Sachs also sees the rapid financialisation of household savings in India. Retail participation has increased over the past year and a half across many markets in the region, including India. “Record systematic investment plan (SIP) flows in August, a large number of SIP and retail account (demat) openings and rising individual ownership of listed equities; all suggest retail investors remain quite active in the market.” 
“We think the fast-growing and popular new economy facing companies, which have been scarce in the public markets until now, will see strong retail demand, which in turn will further support the ongoing financialisation of household savings. We note that Indian household direct allocation to equities remains low at 4% of financial assets compared to the US at 35%and other major markets in Asia, between 10%-22%,” it says. 
While PE and VC investors have been quite active in the new economy start-ups in recent years, there has been a scarcity of such companies in the public markets. The IPO listings allow direct exposure for investors to participate in the hyper growing new economy sectors in India like payments and fintech, e-commerce, food-tech, online grocery, education and entertainment. 
“Given maturing markets in China and the recent regulatory tightening, India could become the next alternative. Given their strong growth potential, we believe the new economy sectors in India can offer attractive return opportunities for investors, as long as investors do not overpay for growth,” Goldman Sachs concludes.
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