India's evolving primary markets and shifting investment trends - do we stay invested?

India's capital markets continue to navigate the shifting geopolitical and economic currents, with primary markets remaining one of the focal points for ultra-high-net-worth individuals (UHNWIs) and institutional investors looking for early stage opportunities promising companies before they go public.

However, recent dynamics paint a more complex picture, and require a more nuanced approach as global markets face correction and Indian markets have not been spared.

Lighthouse Canton IDEAs: Views & Insights recently spoke to Manas Chadha, Managing Director & Co-founder of Lighthouse Canton in India to understand this market better.

"This trend of interest in primary markets in India has been building over the past two years, driven by success stories like Zepto and Swiggy," said Chadha. " While there is continued interest in primary markets, investors are becoming more selective. focusing on companies with strong fundamentals and clear growth paths. Investors, despite the market correction, still want to own companies selectively, before they get tested."

The primary market—where new securities are issued directly by companies to investors—has seen remarkable growth. In 2024, India led globally in IPO volumes, with 337 issues raising USD19.9 billion, nearly double the number of IPOs in the U.S. and more than two-and-a-half times those in Europe, according to EY Global IPO Trends 2024.

Source: EY Global IPO Trends 2024

This surge witnessed in 2024 was fueled by strong GDP growth, rising corporate earnings, increased retail investor participation, and expanding assets under management (AUM) in domestic funds. Government initiatives like Make in India and the push for manufacturing self-reliance have further bolstered capital-raising efforts.

While the recent market corrections have introduced caution amidst investors, India’s long term economic prospects still remain robust. The numbers tell the story. The United Nations forecasts that India will continue to be one of the fastest growing economies globally, predicting a GDP growth rate of 6.6% in 2025, while China's growth is expected to slow to 4.8%.

India's industrial output surged by 5% YoY in January 2025, surpassing economists' expectations and indicating resilient manufacturing and mining sectors.

These positive indicators suggest that despite short-term corrections, the foundational aspects of India’s economy continue to support long-term growth, a sentiment shared by Chadha, who believes investors want to be part of this trajectory.

FOREIGN PARTICIPATION AND SHIFT IN PREFERENCES

Foreign investors continue to demonstrate strong interest in India's capital markets, but their investment strategies are evolving. While participation in large primary rounds remains robust, there is a clear divergence in how Foreign Institutional Investors (FIIs) are allocating capital between the primary and secondary markets.

"If this is a primary round, 100% of the big funds participate," noted Chadha, underscoring the significant FII appetite for fresh equity issuance. In 2024, this trend became even more pronounced, with FIIs actively participating in Initial Public Offerings and Qualified Institutional Placements while simultaneously reducing their exposure in the secondary market.

The numbers paint a clear picture of this shift. FIIs substantially increased their investments in anchor rounds of IPOs, contributing approximately ₹25,300 crore (around USD3.4 billion) in 2024, the highest level since 2021, when their investments stood at ₹29,000 crore (approximately USD3.9 billion).

This record-breaking participation in primary markets aligns with the overall momentum in India's capital markets. Indian companies collectively raised ₹1.5 lakh crore (approximately USD20.4 billion) through IPOs in 2024, surpassing all previous records.

However, they simultaneously retreated from the secondary market, largely due to concerns over high stock valuations. In 2024, FIIs were net sellers, pulling out USD3.42 billion from the secondary market.

In H1 2025, as the IPO market gets jittery, expectations are of an increased activity in the private equity and venture capital space, with many expecting it to be a buyer’s market as businesses look to tap private funding.

There is also a growing optimism that the second half of 2025 (H2) could mark a turning point for public markets. Strongly capitalised companies with robust fundamentals are expected to bounce back as market conditions stabilise.

Another key trend shaping foreign investment flows has been the growing preference for new-age businesses. Many FIIs have tilted their portfolios towards emerging sectors, particularly technology and digital-first companies, by participating in primary market rounds. This signals a broader strategic move to capitalise on the next wave of high-growth enterprises in India.

OTHER TRENDS AT PLAY

Another significant trend identified by Chadha is the emergence of Indian-founded multinational corporations (MNCs). "People want to back companies that have now become MNCs with Indian founders," he noted, highlighting examples such as Ola and Ola Electric.”

This development aligns with the Indian government's initiatives to bolster manufacturing and self-reliance, thereby strengthening the country's industrial base and supply chain capabilities.

The numbers tell the story: The Indian government’s Production Linked Incentive (PLI) scheme has allocated ₹1.97 lakh crore ($26 billion) to boost manufacturing in sectors like electronics, automotive, and renewable energy, since 2020.

Meanwhile, the credit market is undergoing significant transformation. Private sector banks are facing a rise in defaults on small loans and microcredits, a trend expected to persist until mid-2025, driven by slowing economic growth.

As liquidity tightens and lending patterns shift, investors are increasingly looking for distress-driven opportunities, positioning themselves to capitalise on market dislocations.

"Over the last six months and in the coming year, we foresee a lot of pain points in credit markets—but also opportunities," Chadha observed.