While IPO fundraising activity has been subdued this year due to global macro challenges, investment banks have witnessed growing opportunities in mergers and acquisitions (M&As). In an interview, S. Ramesh, managing director and chief executive of Kotak Investment Banking, shares his views on the factors driving growth in M&A, the outlook for the IPO market and the bank’s hiring plans. Edited excerpts:
What is the outlook for capital markets activity?
We have started witnessing initial commentary and signs of interest rate hikes tapering a bit in the future, and it will be an important inflexion point from a primary markets’ point of view, particularly initial public offerings. Having said that, large IPOs, which require both foreign and local funds, may not be launched. That is because foreign funds are still cautious about new investments, but mid-size issues may continue getting launched as mutual funds have mobilised large corpus and will be active primary market participants.
The other important perspective is that it continues to be a buyers’ market, so sellers of equity have to bear in mind that the investors are cautious about the world and markets, and they are likely to price this, leading to muted valuations.
We have seen some fairly big transactions this year. Will M&A activity continue to remain strong?
M&A volumes are going up consistently. We have already witnessed a couple of large deals in financial services and the cement sector. Indian M&A is at an inflexion point, and this year, we expect M&A deals to touch $200 billion and could remain at those levels for years on a sustainable basis.
In many businesses and sectors, valuations are reasonable, compelling buyers to explore inorganic opportunities. Foreign strategic investors have also come back due to the growth potential India offers. There is interest in consumer, technology, manufacturing and financial services. Financial sponsors are sitting on large pools of capital and eager for more buyouts and investments.
Renewables and new energy could see strong M&A activity as corporates are evincing interest in the sector in addition to financial sponsors.
How are new-age technology companies dealing with the funding winter? Do you see large M&A opportunities in this space, especially for structured products?
Funding for new-age technology companies is going through a flux. They are confronting questions like: will IPOs happen? Will funding happen? I don’t think IPOs will happen in a hurry. That cycle will take a while to come back. The theme of growth that we saw 2-3 years ago is now moving to growth and profitability. People are focussing on unit economics. People want to see how the business model will survive shocks. I do see M&A as an important theme for this group of companies.
For the near future, consumer tech may take a bit of a back seat, paving the way for B2B themes and emerging sectors such as sustainability and green tech.
We see that revolution globally, and it will have its own offshoots in the provision of capital. Consumer tech firms may get tested in the quest to raise capital for some more time. We are seeing interest from investors for structured capital than plain vanilla equity.
