PRE IPO shares
Ever wondered how to get in on the front-row seat of the next big success story? Let’s explore why investing in PRE IPO shares could be your key to high returns!
Investors are always hungry for better investment opportunities to generate alpha returns and always have an appetite for the “next big thing” in the industry. One promising strategy to recognize and invest in such an opportunity is through pre-IPO shares, which is acquiring equity stakes in the company during its early growth phase. These shares are often offered at discounted valuations, presenting an opportunity for significant returns as the company scales and gains market recognition.
To provide a thorough analysis of the kinds of return pre-IPO offers, let’s compare them with the return generated by different Nifty indexes. The following chart represents the annualized returns generated by indexes in 5 years from FY19-FY24 and the average annualized return generated by various pre-IPO opportunities (the companies that got listed)
While Nifty indexes offered impressive returns with growth rates ranging from 12% to 27%, the pre-IPO market generated an unparalleled opportunity with a whopping average annual return of 106%. This is a historical representation of how pre-IPOs are generating wealth for investors
Understanding pre-IPO
Companies often look to raise funds before they file for an IPO, viewing this capital as essential for the expansion, managing working capital requirements, maintaining the growth of the company, and preparing it to go public. For that reason, promoters often choose the path of PRE-IPO funding, issuing the shares via private placement to a selective set of investors. HNIs, or institutional investors make PRE-IPO investments with an appetite to invest huge amounts in businesses. Investors take advantage of these funding rounds to invest in companies at their high growth stage and be a part of their potential success.
Advantage
- Higher growth opportunities – Buying an ownership stake in unlisted companies offers higher growth potential and thus, higher return on investment. FY24 saw various IPOs debut at higher prices than their pre-IPO ones, resulting in significant profits for investors who seized these opportunities.
Following are some pre-IPO investments and the prices at which they were bought, issued, and listed. It also illustrates the CAGR generated by investors who bought shares during the pre-IPO phase achieved higher returns compared to those who invested at the IPO stage. Pre-IPO investments are typically made at lower prices before the company goes public, allowing early investors to benefit from substantial price appreciation once the stock is listed and becomes available to the broader market.
- Buy at discounted valuations – To attract the necessary capital before an initial public offering (IPO), businesses often offer shares at prices below the anticipated issue price. These discounts act as compensation for investing in early-stage, high-risk companies and thus the difference leads to significant returns after IPO.
- Diversification – Investors often invest in different asset classes to mitigate their risk, As pre-IPO investments are slightly riskier than publicly listed ones, their inclusion is a good method to diversify the portfolio.
By spreading investments across various asset classes, we can successfully avoid the effect of poor performance of one single security
How to Invest?
There are two methods by which an investor can invest in pre-IPOs.
- Primary sale: One method is when companies directly issue new shares via private placements in the pre-IPO round to HNIs and institutional investors. These involve buying large quantities with substantial capital and a certain lock-in period. The company offering the shares sets the deal’s prices and terms and conditions.
Example – Bluestone, a jewelry retailer recently raised ₹900Cr in the pre-IPO round, receiving funding of ₹600Cr through institutions namely Peak XV Partners, Prosus, Steadview Capital, and remaining from other institutional investors as the jewelry seller plans to go public soon.
- Secondary sale: One way to invest in these companies is via the secondary sale of unlisted company shares, mainly by promoters, employees, and early investors to reap the reward of early investing.
Example – As per the above example, Bluestone also saw a secondary sale of their shares worth ₹300Cr by Kalaari Capital, one of the early investors in the firm. The move was defined by Bluestone as largely to set the acceptable valuation of the company
Key steps for engaging in pre-IPO shares
- Identify promising companies: Pre-IPO investments are riskier as they involve buying unlisted shares, and a thorough knowledge of the company becomes crucial to invest in these asset classes. Various factors like the company’s financials, market position, and growth prospects should be considered and due diligence shall be necessarily completed before investing.
- Connect with platforms dealing in pre-IPO – Engage with online platforms that focus on pre-IPO investments. These platforms often provide access to shares of unlisted companies seeking funding before they go public. Consider factors such as the minimum transaction size, fees, and the pool of buyers.
- Negotiate terms: Work with the broker to negotiate the terms of the pre-IPO investment, including the platform’s minimum transaction size, fees, share price, lock-up period, and any restrictions.
- Complete the transaction: After agreeing to all the terms and conditions, transfer the required investment amount to the broker. The shares are typically credited to the Demat account within a few days.
- Hold the shares: Pre-IPO shares are subjected to lock-up periods that vary based on the type of investor. Upon the conclusion of the lock-up period, investors may decide to divest their shares, contingent upon the company’s capacity to meet their expectations.
