Sovereign wealth funds as anchor investors in IPOs: Evidence from India

Abstract

Prior literature on SWFs exclusively focuses on SWFs' secondary market investments due to the lack of publicly available IPO allocation data. For the first time, this study examines SWFs' primary market investments using a unique dataset of IPOs from India, a country which has a transparent and flourishing IPO market that has attracted large sums of money from SWFs in recent years. Specifically, this study investigates the investment strategies of SWFs as anchor investors in Indian IPOs and their impact on IPO performance. We find that SWFs target IPOs that are larger, attract high pre-market demand, involve lower dilution of owners' stake, and are issued by large and profitable but financially-constrained firms. We also find that anchoring by SWFs has a positive impact on IPO performance. In the short term, SWF-anchored IPOs outperform other anchored IPOs with respect to initial returns, IPO demand and extent of price revisions. In the long run, the buy-and-hold abnormal returns of SWF-anchored IPOs significantly exceed that of other anchored IPOs as well as the market. SWF-anchoring significantly improves issuing firms' post-IPO operating performance too. Overall, our findings support the hypothesis that SWFs may be superior stock-pickers and valuable monitors, leading to better short-term and long-term performance of their primary market targets.