Have you noticed how social gatherings are THE place for investment discussions and discussing your big bets? Irrespective of expertise, everyone has an opinion on where to invest.
Last week, everyone I met socially brought up the topic of Swiggy pre-IPO shares.
It made me realise something important: patient investing is boring and out of fashion, party conversations are only about stock tips, private equity and pre-IPO opportunities.
For me, this is an alarming trend. Private investing is a high-risk- high-reward space. Not everyone entering it understands the underlying businesses, risks and clauses that come with it.
And yet, people are jumping into private investing all guns blazing.
In this blog, I want to delve into the world of pre-IPO opportunities and shed some light on it.
Today, we’ll cover:
- Unlisted markets and pre-IPO opportunities
- How pre-IPO opportunities work
- How to access pre-IPO shares
- A checklist for you to evaluate investing in pre-IPO opportunities
Understanding the unlisted market
While most of us are familiar with listed equities, pre-IPO company shares are actually unlisted shares that are expected to be listed soon. These are equity shares of companies not listed on any stock exchange and, therefore, do not trade publicly. Such shares have become the new investment avenue everyone is talking about.
To understand them better, let’s compare listed and unlisted equities.
When it comes to listed shares, investors can access them through Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs) and buying/selling on the stock exchanges.
Unlisted shares are usually bought and sold directly between individuals or through intermediaries, such as brokers, dealers, or direct sellers.
Understanding pre-IPO opportunities
Pre-IPO shares can be broadly classified into two categories based on the nature of the transaction –
- Private placement – The company issues new shares to a limited group of people through private placement, and the terms of the deal, including the valuation of the company, are mutually agreed upon.
- Sale of shares – Existing private company shareholders sell their shareholdings through intermediaries, and the price is determined by demand and supply.
Why pre-IPO investing?
Investors are drawn to Pre-IPO shares for the following reasons –
- Potential for higher returns – Opportunity to gain significant value by entering at lower valuations before public listing
- Easier access – Investors can buy into promising companies with high-growth potential before they grow
- Diversification – Lower correlation with public market movements
Risks associated with pre-IPO investing
- Lack of timely, credible information– It is difficult to access the financial and operational data of unlisted companies and determine the valuation of a company. This makes research and due diligence challenging.
- Illiquidity– Investors cannot easily trade or sell purchased unlisted shares.
- Long time horizon– There can be internal or external factors that impact the listing of a company which can impact the investor’s investment horizon.
- Regulatory uncertainty– Pre-IPO shares do not fall under SEBI’s regulatory framework, and they are not subjected to the same regulatory and compliance standards as listed companies.
Coming to the most interesting part, how do you participate in pre-IPO opportunities?
Accessing pre-IPO shares
Accessing pre-IPO shares is more complex than trading in the primary or secondary market. It often requires connections, special channels, or financial intermediaries.
Here’s how investors typically enter this market –
- Pre-IPO investment platforms
There are many platforms that specialise in facilitating the buying and selling of shares in unlisted companies. If you opt for such platforms, it is important to ensure that these platforms are vetting opportunities and complying with SEBI regulations.
- Brokerage firms and investment banks
Several brokerage houses and investment banks offer access to pre-IPO shares. They act as intermediaries and facilitate retail or institutional investors with an opportunity to participate in pre-IPO funding rounds.
- Angel networks
High-net-worth individuals (HNIs) can explore opportunities through angel networks who wish to exit their positions in companies that are likely to go public in the future.
- Employee Stock Option Plans (ESOPs)
Employees of companies nearing their IPO often hold ESOPs. Investors can purchase these shares in secondary markets from employees who want to liquidate their holdings. Employees can even sell their ESOPs on various marketplaces like EquityZen and Shareskart.
- Direct deals with companies/promoters
Sometimes, HNIs and UHNIs gain access to pre-IPO shares directly from company promoters or founders. These deals are often facilitated through a company’s investor relations or private equity desk and require substantial capital and negotiation expertise.
- Alternative Investment Funds (AIFs)
These are privately pooled investment vehicles that invest in alternative asset classes and can offer pre-IPO exposure as part of their investment portfolios.
Who are pre-IPO opportunities for?
While there are many metrics such as industry, company financials, valuations, market position, team, management and investor backgrounds that you need to evaluate when assessing pre-IPO opportunities, my experience is that real wealth creation happens under the guidance or advice of experts whose primary job is to provide these opportunities. Experience, understanding and knowledge are essential when investing in the private investment space.
Ideally, pre-IPO investments are for investors –
- with significant financial resources, willingness to lock in their capital for extended periods and high-risk absorption capacity.
- with a deep understanding of equity markets, valuations, and the risk factors associated with unlisted companies.
- who want to diversify their portfolios beyond traditional equity, debt, or real estate.
- with the ability to conduct due diligence or access to experts who can do the same.
- who are aware of regulatory compliance.
In my experience as a wealth manager, private investments are fruitful when investors –
- are disciplined on the allocation towards private investments (eg: Keeping a cap of 10-15% of the total portfolio towards private investments).
- get exposure to such shares through institutional investors/ regulated channels.
- consult experts who have sectoral expertise, are skilled at due diligence and are well-versed in such investments.
Minimum investment requirements
Investing in pre-IPO shares typically requires a substantial financial commitment compared to traditional equity investments. Minimum investment amounts can vary widely, depending on the company, the platform or the source of the shares.
1. Unlisted investment platforms – Varied, depending on the availability of unlisted shares.
2. PMS – Minimum INR 50 lakh. Under the Non-Discretionary Portfolio Management Service (NDPMS), portfolio managers can invest up to 25% of the client’s AUM in unlisted securities through various routes like AIFs, debt securities, shares, etc.
3. AIFs – Category-II AIFs that pool funds for private equity or pre-IPO investments usually have minimum ticket sizes of INR 1 crore, as mandated by SEBI.
Exit strategies
1. IPO listing – The most common exit route is waiting for the company to go public. Upon listing, pre-IPO shares can be sold on the stock exchange. Under SEBI’s ICDR amendment regulations, equity shares issued to AIFs/ VCFs/ FVCIs shall be locked in for a period of 6 months from the date of purchase.
2. Secondary market sales – Pre-IPO shares can be sold in the secondary market to other private investors, institutions, or via unlisted stock platforms. However, this depends on demand and regulatory compliance. Pricing depends on company valuation trends and market sentiment regarding a potential IPO.
Evaluating pre-IPO opportunities
While we talk about exiting pre-IPO investments, I want to highlight a very important aspect. Investors must evaluate the company’s IPO readiness before considering these investments. Factors like financial performance, corporate governance, regulatory approvals and industry positioning play an important role in determining the likelihood and timing of a successful IPO.
Here’s a quick checklist for you to assess your own readiness for pre-IPO investments
In summary
While pre-IPO investments can seem exciting and lucrative, investors should approach it with a cautious stance.
Navigating through these waters demands a deep understanding of the underlying business and market dynamics and a clear understanding of your own risk appetite, goals and liquidity requirements.
If you are considering investing in pre-IPO opportunities, you must do your due diligence and take professional advice to ensure you are well-placed to capitalise on opportunities.
Disclaimer: The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice.
Our licenses: Dezerv Investments Private Limited is a Portfolio Manager with SEBI Registration no. INP000007377 and also acts as an Investment Manager to Dezerv Innovation Fund, Category – I AIF-VCF-Angel Fund; Dezerv Private Equity Fund and Dezerv Alternatives Trust , Category II AIFs bearing SEBI Registration no. IN/AIF1/22-23/1066; IN/AIF2/23-24/1331 and IN/AIF2/23-24/1345 respectively and Dezerv Alpha Equity Trust, a Category III AIFs bearing SEBI Registration no. IN/AIF3/23-24/1467. Dezerv Investments Private Limited is also a SEBI registered Research Analyst with registration no. INH000014915.
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