Why More SMEs Are Choosing the IPO Route Over Private Equity
Khusbu Agrawal
Khusbu Agrawal (the “Valuer”) is a Fellow Member of the Institute of Company Secretaries of India (ÏCSI) having membership No. F11833. The Valuer is registered with the Insolvency and Bankruptcy Board of India (Registration No. IBBI/RV/03/2021/14393) to undertake the Valuation of Securities and Financial Assets of the Companies. She has more than 8 years of experience in Corporate law, merger & acquisitions. She has also done LLB, Master’s in Commerce and Master’s in journalism & Mass Communication. Further, Ms. Khusbu Agrawal has done post qualification course i.e. Certificate Course on Intellectual Property Rights conducted by ICSI. She is a qualified Independent Director and Social Auditor.
For decades, private equity (PE) investors were seen as the lifeline for small and medium enterprises (SMEs) looking to expand. Their capital infusion, combined with advisory support, helped businesses unlock new growth opportunities. However, in recent years, an intriguing shift has emerged: a growing number of SMEs are opting to raise funds through the initial public offering (IPO) route rather than relying solely on private equity. This transformation is not merely about accessing capital; it also reflects evolving market dynamics, investor sentiment, and the strategic ambitions of entrepreneurs.
The Traditional Appeal of Private Equity
Private equity funding historically offered SMEs several advantages. Beyond providing capital, PE investors also brought management expertise, industry connections, and strategic guidance. For family-owned or closely held businesses, this partnership often accelerated professionalization and allowed them to compete with larger players.
Yet, PE investments often come with trade-offs. Control dilution, stringent return expectations, and pressure to meet aggressive performance benchmarks can create challenges for SMEs. Moreover, the exit strategies of PE firms—usually through buyouts or IPOs—sometimes prioritize investor returns over long-term business goals.
With increasing awareness of these constraints, SMEs are rethinking whether PE is the right avenue for their growth aspirations.
The Rise of SME IPOs
In the last decade, SME-focused IPO platforms have gained significant traction, particularly in markets like India, where stock exchanges have dedicated SME boards (such as NSE Emerge and BSE SME). These platforms are specifically tailored for small businesses, providing easier access to the capital markets while ensuring compliance with regulatory norms.
By going public, SMEs are not only raising funds but also gaining visibility, credibility, and access to a wider pool of investors. The IPO route has evolved into more than just a fundraising mechanism; it is now a powerful branding and growth strategy.
Why SMEs Prefer IPOs Over Private Equity
- Greater Control Retention
Private equity typically involves giving up a substantial equity stake and often board-level influence to investors. Entrepreneurs may feel constrained by the oversight and decision-making authority of PE partners. In contrast, IPOs allow SMEs to raise capital while still retaining operational control. Although they must comply with regulatory norms and maintain transparency, promoters usually retain a majority stake, safeguarding their long-term vision for the business.
- Access to a Broader Investor Base
An IPO opens the doors to retail investors, institutional players, and high-net-worth individuals, spreading the ownership base. This diversification reduces dependence on a single investor, unlike PE funding where a concentrated investor group can dominate strategic decisions. Moreover, listing on an exchange creates opportunities for future fundraising rounds through rights issues or follow-on offerings.
- Enhanced Visibility and Credibility
Being listed on a recognized exchange significantly boosts a company’s profile. Customers, vendors, and stakeholders often view listed companies as more reliable and stable. This visibility not only strengthens brand reputation but also helps attract better talent, forge new partnerships, and negotiate favorable terms with suppliers and lenders.
- Potentially Better Valuations
Private equity deals are usually driven by intense negotiations, with investors aiming for lower entry valuations to maximize their returns. IPOs, on the other hand, allow valuations to be discovered through market demand and supply. If investor sentiment is favorable, SMEs often secure higher valuations in the public market compared to private placements.
- Liquidity for Promoters and Investors
An IPO provides liquidity to promoters and early investors by creating a tradable market for shares. Unlike PE funding, where exits are tied to rigid timelines and structured deals,public markets provide greater flexibility. Shareholders can sell their stake gradually, depending on market conditions, without waiting for a formal exit event.
- Transparency as a Competitive Advantage
While compliance and reporting requirements of a listed company can seem burdensome, they instill confidence among stakeholders. Financial transparency and governance standards enhance trust, particularly with lenders and institutional investors. For SMEs aiming to scale rapidly, this credibility can be a game-changer.
Market Drivers Behind the Shift
The preference for IPOs is not solely due to internal SME motivations—it is also shaped by broader market trends:
- Investor Appetite for Growth Stories: Retail and institutional investors are increasingly drawn to SME IPOs, recognizing their potential to deliver high growth compared to mature large-cap companies.
- Regulatory Push: Exchanges and regulators have simplified listing requirements for SMEs, reducing entry barriers while ensuring investor protection.
- Digital Transformation: The adoption of technology has enabled SMEs to scale more quickly and operate more efficiently, making them attractive candidates for public markets.
- Economic Growth Tailwinds: In emerging economies, government initiatives supporting entrepreneurship and capital market participation are fueling SME listings.
Challenges of the IPO Route
While the benefits are substantial, SMEs must also weigh the challenges of going public:
- Compliance Burden: Regular disclosures, audits, and corporate governance requirements can strain the resources of smaller companies.
- Market Volatility: IPO performance is heavily tied to market conditions, which may impact fundraising and valuation.
- Costs of Listing: Legal, advisory, underwriting, and regulatory costs of IPOs can be significant compared to private equity deals.
- Short-Term Pressure: Public companies often face quarterly performance scrutiny, which can shift focus away from long-term strategic planning.
Despite these challenges, many SMEs view the trade-offs as worthwhile, especially when the alternative is heavy dependence on private investors with limited flexibility.
Case in Point: The Indian Experience
India serves as a compelling example of this shift. The SME platforms of NSE and BSE have collectively hosted hundreds of listings in recent years, with many companies migrating to the main boards after reaching a certain size. Investor enthusiasm has been evident, with several SME IPOs oversubscribed multiple times.
The success of these IPOs has encouraged more entrepreneurs to consider the public route, reinforcing a virtuous cycle. As more SMEs are listed, investor trust grows, leading to stronger market participation.
Looking Ahead
The momentum toward IPOs is likely to intensify in the coming years. SMEs that are well-governed, technologically agile, and strategically ambitious will increasingly see public markets as the natural path for growth. Private equity will continue to play a role, particularly for businesses requiring sector-specific expertise or substantial funding. However, the balance of preference is clearly tilting toward IPOs.
For SMEs, the decision is no longer just about raising funds—it is about choosing a platform that aligns with their long-term vision, governance style, and growth trajectory. IPOs, with their blend of visibility, valuation, and flexibility, are emerging as the preferred choice.
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