Ever wondered how anchor investors can be the secret ingredient to a business’s success?
Anchor investors are HNIs or institutional investors that lie under Qualified Institutional buyers (QIB) which involve entities like mutual funds, pension funds, alternative investment funds, foreign portfolio investors, and sovereign wealth management platforms.
Anchor investors own large ownership stakes in a company through its IPO debut. The price at which shares are offered to anchors is fixed and is allotted one day before the company goes public. Thus, anchor investors can gain high returns by investing in IPOs. Looking at the top 100 anchor investors in the SME IPO for FY2007-24, it was observed that they saw gains ranging between ~ 6% to 960%. The top five investors gained between 506% and 956%.
The below table highlights top10 biggest Anchor investments, the funds they invested, and the returns they generated between FY2007-FY2024
Let’s look at some important features of Anchor investors
- Anchor investors are marquee investors in an IPO.
- The minimum amount an anchor investor can invest ranges from ₹10cr (Mainboard IPO) and ₹1Cr (SME IPO).
- Anchor investors buy shares at a price within the IPO price range.
- Allotments for these investors usually range from ~18% to 45% of the total issue size or are fixed at 60% of stocks available for qualified institutional buyers.
- Anchors can sell 50% of their investments within 30 days, and the remaining 50% can be sold after a lock-in period of 90 days.
One of India’s largest and most successful IPO, Tata Technology saw the participation of 67 anchor investors. It raised ₹791 crores by offering ₹1.58 crore shares. This pre-IPO investment accounted for approximately 26% of the total funds raised, underscoring how anchor investors can provide crucial momentum and credibility, driving successful fundraising and reinforcing their role as catalysts in the IPO process.
How do Anchor Investors work as catalysts for fundraising?
In recent years, there have been several debuts through IPOs. These IPOs saw huge amounts of investment being made by anchor investments. Anchor investors saw an aggregate investment of ₹11,978Cr in 2023 by FPI, Mutual funds, insurance companies, and AIFs, with mutual funds investing the largest among anchors. Mutual funds have invested a higher percentage than FPIs in CY2023.
Let’s look at how these investors act as a catalyst for companies going through IPO.
- Building investor confidence: Anchor investors purchase significant portions of a company and are allotted shares one day before IPO. Anchor investors, commit to purchase a certain ownership stake in a company of shares before it goes public. Their involvement acts as a valuable endorsement of the company’s prospects, signaling to other potential investors that the offering is credible and worthy.
- Example – Awfis Space Solutions Ltd, a co-working space raised ₹268 Cr approximately 45% of the IPO from Anchor investors. The IPO saw the participation of many known anchor investors like Goldman Sachs, EastBridge Capital Master Fund, HDFC Mutual Fund (MF), ICICI Prudential MF, Axis MF, etc. Their backing boosted confidence and led to the overall IPO being subscribed by a whopping 108.56 times, with the allocation of Non-Instituional investors being subscribed 129.81 times.
- Price validation: The participation of anchor investors facilitates the discovery of the correct price. Anchor investors hold a significant stake in a company therefore the price they are willing to pay defines the worth of the company and the right price at which it should be traded.
Anchor investors cannot acquire shares at a discounted price than its IPO price band. Therefore, the price at which shares are allocated to these investors validates the IPO price. - Mitigating risk: Investments by anchor investors reduce the probability of an IPO failure. Anchors facilitate the building process of an IPO. As the amount of capital raised through anchors increases it decreases the dependency of raising funds through the public, lowering the risk of failing to meet the funding target.
By ensuring that a substantial portion of the offering is already subscribed, anchor investors create a safety net that enhances the overall likelihood of a successful fundraising campaign. - Influencing media coverage: The participation of well-known anchor investors influences how media showcases and publicizes an IPO. Positive media coverage boosts investor confidence and attracts more participation.
When reputable firms are involved, the media highlights their participation, which can create a perception of stability and reliability around the IPO.
In summary, anchor investors are crucial in boosting fundraising efforts during IPOs by building confidence, facilitating price discovery, mitigating risks, and influencing public perception of a company. Their strategic involvement enhances the credibility of the IPO but also plays a significant role in ensuring its success.