Veteran investor Warren Buffett has often voiced his reservations about primary market investments. As he noted at a Berkshire Hathaway meeting back in 2004, IPOs are often timed by sellers to their advantage, not necessarily the investor’s. However, current trends in India’s financial markets suggest a departure from this cautious approach, at least among foreign portfolio investors (FPIs).

Valuation Magnet for FPIs

Recent reports indicate a significant surge in FPI interest in the primary market. Their investment in IPOs has climbed to a four-year peak of $6.4 billion, even as they’ve been net sellers in the secondary market, offloading shares worth $4.5 billion. This pivot towards IPOs comes as many secondary market stocks trade at record valuations, prompting fund managers to seek more reasonably priced opportunities. The valuation appeal is clear: IPOs offer a fresh entry point before the often-heated trading in the secondary market begins.

Aye Finance’s Bold IPO Move

Adding to the primary market buzz, Aye Finance, a non-banking finance company (NBFC) focused on SMEs, is preparing for a substantial IPO. The company, backed by Alphabet, aims to raise between Rs 1,700–2,000 crore. This move underscores the growing confidence in the Indian economy and the SME sector in particular. With a loan book of Rs 4,473 crore and a net profit jump from Rs 57 crore to Rs 161 crore in FY24, Aye Finance’s IPO signals the robust health of the primary market and the appetite for SME-focused financial instruments.

India – A PE Hotspot

India’s emergence as a preferred investment destination is a key factor driving this IPO enthusiasm. Global growth may be slowing, but India’s economic engine continues to rev. The influx of foreign funds isn’t just limited to IPOs. Reports suggest that half a dozen foreign funds have established offices in India in 2024 alone. Private equity and venture capital activity is also booming. PwC India notes over 800 active PE/VC funds have invested over $50 billion since January 2023. The successful exits and returns achieved by PE players through IPOs and secondary market sales have further amplified India’s attraction for global investors. While Buffett might remain wary of IPOs, the broader investment community clearly sees significant opportunity in India’s primary market.

For investors, this IPO rush presents both opportunities and challenges. While primary market investments can offer value, careful due diligence remains crucial. The Indian IPO market is vibrant, but not every offering is a gem. As more companies tap the primary market, discerning quality from hype will be essential for sustained investment success.