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Public sector IPOs score over private counterparts

With the exception of this year, IPOs in all other years since 2004 have yielded positive returns on a
cumulative basis for PSUs

Our favourite holding period is forever” is the famous quote from Warren Buffett, chairman and chief
executive officer of investment company Berkshire Hathaway Inc. and the world’s richest man in 2008,
according to Forbes magazine.

Data on initial public offerings (IPOs) compiled by Nexgen Capitals Ltd, the investment banking arm of
New Delhi-based financial services house, SMC Global, shows the essence of Buffett’s investment
thesis. The longer you hold, the less likely you are to lose.

The cumulative value of the $6.2 billion (Rs30,256 crore today) raised via IPOs in 2004 was up at $10.37
as on 15 October. That’s a gain of 67%. The value of the $2.26 billion raised from public issues in 2005 is
up at $2.57 billion, a gain of 14%. This is in stark contrast to the funds raised in the more recent period:
The cumulative values of all funds raised through IPOs in 2006, 2007 and 2008 are down 7%, 39% and
59%, respectively. Of course, these results are also a function of market timing. IPO investors in early
2008 couldn’t have chosen a worse time to invest and, with some stocks, even holding them forever may
not help.

But what’s more interesting about the NEXGEN data is that IPOs from public sector undertakings
(PSUs) have fared far better than their private sector counterparts. PSUs raised $6.26 billion between
2004 and 2008, the mark-to-market value of which stands at $10.21 billion. This translates into a gain of
63%.
On the other hand, the $19.55 billion raised by private sector firms is quoting 23% lower at $15.14 billion.

Nexgen attributes this trend to the realistic pricing of public sector IPOs, vis-à-vis the very aggressive
pricing that private sector firms set while trying to raise money from the public.
In fact, with the exception of this year, IPOs in all other years since 2004 have yielded positive returns on
a cumulative basis for PSUs. But in the case of private sector firms, even with the IPOs in 2006 and 2007,
the cumulative returns are negative.