IPO as an Exit Route: What It Offers and What It Costs

An offering is the one route out where the price comes from a market rather than from a single buyer across a table. An offering rarely finishes the job. Part of the holding is sold into the offering and the rest afterwards, so the position leaves in two legs with an interval between them, and through that interval the fund holds listed shares at a price it does not set.

How a company issues shares to the public, how an issue is arranged and priced, who may apply for it, and how a quotation works once trading has started are all covered separately. The interesting moment comes one step later, when a fund that has held an unlisted business for years becomes a seller into that process, and exactly one thing from all of that matters: after an offering there is a published price, made continuously, on a business whose value this fund had until then been reporting four times a year. Everything awkward about this route follows from a seller still holding shares once such a price exists.

Which routes a private fund has for turning a holding into cash, and how the five of them compare with each other, is covered separately. One of them is worked below from end to end on a single position. One warning before the arithmetic starts, and it governs every line: an offering is not the best way out of anything, reaching one proves nothing about a business, and no fund need aim at one. An offering is a route with a particular shape, and the shape is what follows.

What does an offering give a fund that no other route out does?

Picture a farmer with a truck of onions at four in the morning. There are two ways to sell them. One trader can walk up at the gate, look at the load, name a number, and the farmer either takes it or drives home. Or the load goes into the market yard, where a dozen buyers call out against each other and a number forms in the open in front of everybody. The market yard does not promise a bigger number. The market yard promises a number made by more than one person at once, and a farmer who has only ever sold at the gate has never seen that happen.

An initial public offeringThe sale of shares in a company to the public for the first time, after which the shares are quoted. is the market yard, and it is the only route out of a private holding where the price arrives that way. Every other way a fund leaves a position ends in one number agreed with one counterparty across a table, and this one does not. The whole route is built on that single difference, and the three things it actually gives a seller are worth naming precisely.

First, a price made by a market rather than agreed with a buyer. Second, money that comes from many hands at once, so the cash does not depend on persuading any one party to write a very large cheque. Third, a quoted holding for whatever the fund keeps back, so the retained sharesThe shares a fund still holds after the offering. now have a figure attached to them every trading day. Three genuine differences, and there is not a fourth, whatever the route may feel like from the outside.

There is one more consequence that people try to put on the list, and it belongs on neither side. After an offering the business has a public price. A public price is useful to a seller who wants to know what its remaining shares are worth, and uncomfortable to a seller whose remaining shares are now visible to anyone who cares to look. A public price is not a benefit and it is not a cost; it is a change in the seller's situation that cuts in both directions at once. Filing it under benefits quietly turns a route into a recommendation.

How much of the money arrived on the day of the offering?

Here is the position this guide works on, and every figure below comes from it. Holding 3 of Nilgiri Growth Partners Fund II, an invented fund, is Tungabhadra Logistics Private Limited, an invented company. The fund entered at Fund II's Year 2 Q2 and paid Rs 60,00,00,000. At Year 8 Q1 the company went to an offering, and the fund sold part of what it held into that offering and the rest afterwards. Across those 5.75 years the position produced Rs 1,50,00,00,000 in total, being 2.50 times the Rs 60,00,00,000 it cost. The 2.50 times is an outcome and nothing else, what the arithmetic produced on one invented holding over one stated period, not an achievement and not a thing to expect.

Set the first row against the second. The coincidence between them is the reason this route repays a slow reading. The offering itself returned Rs 60,00,00,000 to Nilgiri Growth Partners Fund II, and the position had cost Rs 60,00,00,000. On the day the offering completed, this fund had recovered exactly what it had paid at Year 2 Q2 and not one rupee more. Each of those two sales is a legOne of the two separate sales that together take a position out through an offering., and the first leg here happens to land precisely on cost. The landing on cost is a feature of this invented holding rather than a rule about anything, and it makes the arithmetic unusually clean. Everything the position ever produced above its cost sat, on that day, in shares that had not been sold.

Say it as a percentage and name the denominator. A percentage with no denominator has said almost nothing. Rs 60,00,00,000 out of the Rs 1,50,00,00,000 this position eventually produced is 40.0 per cent. Rs 90,00,00,000 out of the same Rs 1,50,00,00,000 is 60.0 per cent. The two add to Rs 1,50,00,00,000 and to 100 per cent, and the smaller share is the one that came first.

Why does the position not leave in one go?

The two-leg shape is the part that surprises people, and the honest answer has two halves that sit at very different heights. The first half is mechanical and fits in one sentence. An offering is a sale of a defined number of shares, and a holder whose position is larger than the part being sold into it still has a position when the day ends. Nothing has gone wrong. The arithmetic simply did not consume the whole holding, so a second sale has to happen later, and that second sale is called a sell-downThe sale of shares a holder kept back at the offering, once it is free to sell them..

The second half is settled somewhere else entirely. The rules on what a holder of this kind may sell into an offering, what it must keep back, how long any lock-inA period during which certain holders may not sell their shares, on conditions set by the regulator. on the rest runs and whom those conditions bind are all set by the Securities and Exchange Board of India at sebi.gov.in. The conditions change. Any figure for them has to come from the current text rather than from a summary. The current text at sebi.gov.in is the only place to get that answer, and going there is a habit worth more than any summary of it.

So the shape of the route is fixed before the fund does anything clever. Money arrives in two instalments, separated by a stretch of time whose length is a matter for the regulator, and the fund is a holder of shares throughout that stretch.

What is the fund holding between the two legs?

Suppose a household sells half its gold at the jeweller's this morning at the rate on the board, and the other half is committed elsewhere and cannot be touched until a date somebody else has chosen. Between this morning and that date the rate on the board changes every single day. The household is not trading and is not deciding anything. The household is simply exposed, and the only honest description of its position is that half of it is now worth whatever the board says on the day the second sale finally happens.

The household's position is the fund's situation between the two legs, and it is the one thing this route has that no other route out of a private holding has at all. A sale to a buyer in the same industry settles in one transaction. A sale of the whole position to another fund settles in one transaction. Selling part of a position privately settles in one transaction. Even a write-off is one event. An offering alone puts an interval in the middle, during which Nilgiri Growth Partners Fund II still held shares in Tungabhadra Logistics Private Limited, could not sell them, and watched their value move at a price it had no part in setting.

Notice what changed about the fund's own reporting at the same moment. Before the offering the holding had one figure a quarter attached to it, produced by a process on a timetable. After the offering it had a figure every trading day, produced by strangers. The business was the same business. Only the author of the number and the frequency had changed.

What happened when the rest was finally sold?

Once the lock-in on the shares Nilgiri Growth Partners Fund II had kept back came to an end, those shares were sold, and that sale produced Rs 90,00,00,000. Set against the Rs 1,50,00,00,000 the position produced in all, that second leg is 60.0 per cent of everything the holding ever generated for this fund across its 5.75 years. The larger part of the result did not arrive at the offering; it arrived afterwards, at a price nobody had agreed on the day of the offering.

Two things are worth care here. The first is the silence about what those shares did between the two sales. The record holds one figure for the second leg and not a story about how it got there. Rs 90,00,00,000 is what the sell-down produced for this invented fund and that is the entire claim. The second is that the record puts both legs inside Fund II's Year 8 Q1 and does not say how much time separated them. The interval is real and its length is not on the record.

The journey of the Rs 1,50,00,00,000 after it reached the fund, and the order in which a fund of this kind pays money out, are covered separately. The account of this route ends at the fund's bank account.

What does this route cost in cash, and where does that cost show up?

Think of a household selling a plot of land. The sale cheque is one number, and the lawyer's bill, the paperwork and the agent are a different, much smaller number that leaves the household's own bank account. Somebody who only looks at the cheque never sees the bill. The cheque and the bill are two separate flows, and a reader who nets one against the other in their head has quietly changed both figures.

A fund works the same way, and here the small number is easy to name. The transaction expensesThe one-off costs of doing a particular deal, borne by the fund rather than by the business. on the sell-down of holding 3 were Rs 50,00,000. Against the Rs 1,50,00,00,000 that this position produced for Nilgiri Growth Partners Fund II over its 5.75 years, that is 0.33 per cent. The figure is small, and its smallness is the lesson. Most of what this route costs is not cash at all.

The Rs 50,00,000 never comes off the proceeds as a deduction. The charge sits as a line inside a capital call, and investors funded it. The call in question is drawdown 16 of this fund's seventeen, issued at Year 8 Q1 for Rs 6,30,00,000, and it has exactly three parts: Rs 5,00,00,000 of management fee for the year, Rs 80,00,000 of operating expenses for the year, and the Rs 50,00,000 of transaction expenses on this sell-down. Rs 5,00,00,000 plus Rs 80,00,000 plus Rs 50,00,000 is Rs 6,30,00,000, and that is where a reader can actually go and find the cost of this route rather than taking anybody's word for it.

Now hold the same Rs 50,00,000 against two different denominators and watch it change size. Against the Rs 6,30,00,000 of that capital call it is 7.9 per cent. Against the Rs 1,50,00,00,000 of proceeds it is 0.33 per cent. Neither is wrong and neither is the figure on its own; what makes either of them mean anything is saying out loud what it is a percentage of.

What does it cost that is not cash?

The Rs 50,00,000 is the easy cost, and it is not the important one. Here is the important one, and it is a cost that cannot be put on an invoice. On the day of the offering, 40.0 per cent of what this position would eventually produce for Nilgiri Growth Partners Fund II had been settled in cash. The other 60.0 per cent had not been settled at all. There was no agreed number for it, no signed document containing one, and nobody in the world who was obliged to pay one.

Compare that with the shape of a negotiated sale, where a fund and a buyer argue over a single figure and then that figure is the answer for the whole position on the day the agreement is signed. The route through an offering does not settle the whole number on any single day, and the part it leaves unsettled was, on this invented holding over this period, the larger part. The unsettled part is the exposure, and it is not a flaw in the route or a hidden charge. An offering is simply built that way.

The arithmetic of that dependence is very simple and worth seeing as a shape rather than a sentence. The total this position produced equals the Rs 60,00,00,000 already banked plus whatever the kept-back shares eventually fetched. Two readings of that line fall straight out of figures the record already holds. If the kept-back shares had fetched nothing at all, the total would have been Rs 60,00,00,000, precisely what the holding cost, and the fund would have got its money back and no more. If they had fetched two thirds of what they did, the total would have been Rs 1,20,00,00,000, and that figure is not a made-up landmark either: it is exactly what this fund had been reporting for the holding at its Year 7 year end. Both readings are just the line, read at two points that the record itself supplies.

What did the offering do to the reported value?

One more locked figure belongs here and it is uncomfortable in a useful way. At Nilgiri Growth Partners Fund II's Year 7 year end, the carrying valueThe figure a fund reports for a holding it has not sold. of holding 3 was Rs 1,20,00,00,000, being 2.00 times the Rs 60,00,00,000 it had cost. The position then realised Rs 1,50,00,00,000, being 2.50 times cost, in Year 8 Q1. The reported figure moved half a turn on the day the transaction happened, and nothing whatsoever changed about the company on that day. Rs 1,50,00,00,000 less Rs 1,20,00,00,000 is Rs 30,00,00,000, and Rs 30,00,00,000 is exactly 0.50 times the Rs 60,00,00,000 of cost, so the two ways of stating the move agree to the rupee.

The gap between a figure a fund reports and a price a transaction later produces is called a valuation lagThe gap between a reported value and the price a transaction later produces., and how a private fund arrives at the figures it reports, why they lag in both directions and what machinery sits behind them are covered separately. Here the lag matters for exactly one reason: it is part of what the route costs a reader who trusts a reported number as though it were a price. The lag is a warning to anybody reading a reported number, and the mechanics of the reporting sit elsewhere.

Where do the conditions come from, and who can change them?

Every question about this route falls into one of two piles, and telling them apart is a more valuable habit than any single answer. The first pile is facts about one invented fund over one stated period: how much arrived, when it arrived, what it cost in cash, what the holding had been carried at. Every one of those facts can be checked against the arithmetic above. The second pile is conditions, and conditions are made by an authority.

Whether a holder of this kind must keep shares back at all, how long any lock-in on them runs, whom it binds, from when, and what has to be disclosed to whom are all set by the Securities and Exchange Board of India at sebi.gov.in. They change. The authority is named here; the conditions themselves are read in the current text at the source rather than recalled from a summary. Anything about the portfolio company's own filings, its board and its share transfers sits with the Ministry of Corporate Affairs at mca.gov.in on exactly the same terms: named, and not stated.

A reader who knows which pile a question belongs in goes to the current text rather than to a remembered number that quietly went out of date three amendments ago. The habit answers such a question correctly for the rest of a working life.

What do the two legs add up to?

Put the two amounts side by side one last time and let the proportions do the arguing. Rs 60,00,00,000 came at the offering. Rs 90,00,00,000 came from the sell-down. The two add to Rs 1,50,00,00,000, or 2.50 times the Rs 60,00,00,000 that Nilgiri Growth Partners Fund II paid for holding 3 at Year 2 Q2 and held for 5.75 years. The first leg is 40.0 per cent of that total and the second is 60.0 per cent. The two percentages add to 100.0, the only check this arithmetic needs.

The smaller leg came first, it landed exactly on the cost of the holding, and the larger one arrived afterwards under conditions the fund did not set. Note carefully what that does and does not say. On this invented holding, over this period, the second leg happened to be the bigger of the two. Nothing about the route makes that the usual shape, and a reader who walks away believing the back half is always the better half has learned the wrong lesson from a single case. The split is a fact about holding 3, not a property of offerings.