Even as fundraising via initial public offerings (IPOs) and qualified institutional placement trebled in the first half of 2024-25, there has been a rush of retail investors to the IPO market. Investors also come across the term ‘pre-IPO’ in the market. But, what exactly is ‘pre-IPO’? Here’s a straightforward guide to help you understand everything about pre-IPO investments.
What is pre-IPO?
‘Pre-IPO’ stands for pre-initial public offering. It refers to the stage when a private company issues shares to select investors before listing on the stock exchange. During this period, a company raises funds to meet its growth and expansion goals. The stock market debut, or IPO, marks the first time the company offers its shares to the general public. Before this public phase, certain investors get a chance to buy in, hence the term ‘pre-IPO’.
Why Do Companies Offer Pre-IPO Shares?
Companies sell pre-IPO shares for several reasons:
1. Raising Capital: These funds help fuel growth and expansion or settle existing debts.
2. Building Investor Interest: A successful pre-IPO can indicate market excitement, which may boost the IPO’s success.
3. Funding Growth: It allows the company to ensure it has enough funds to improve infrastructure, product lines, or enter new markets before going public.
Who Can Invest in Pre-IPO Shares?
Pre-IPO investments aren’t generally accessible to everyone. They are usually offered to a select group, including:
1. Institutional Investors like venture capitalists, mutual funds, and private equity firms.
2. High Net-Worth Individuals (HNIs) with enough capital to bear the risk associated with pre-IPO investments.
3. Company Employees and Promoters may sometimes be offered pre-IPO shares at discounted rates.
Benefits of Investing in Pre-IPO Shares
Early Opportunity: You can invest at an early stage, potentially gaining from substantial price increases when the company goes public.
Discounted Price: Pre-IPO shares are often priced lower than the IPO price, giving early investors an opportunity to maximize returns.
Diversification: Adding pre-IPO shares to your portfolio can provide diversification, especially if you hold mostly public companies.
Risks of Pre-IPO Investments
Like all investments, pre-IPO investments have risks, especially for layman investors:
1. Illiquidity: Pre-IPO shares are not listed on the stock exchange, making them less liquid. You may have to wait for an extended period to sell them.
2. High Risk: Not all companies that plan to go public succeed. There is always a risk of financial loss if the company underperforms.
3. Lack of Information: Unlike listed companies, pre-IPO companies may not provide sufficient data regarding financials, making it harder to evaluate them.
How to Buy Pre-IPO Shares
Through Brokerage Platforms: Some platforms specialize in offering access to pre-IPO shares, although they often cater to high net-worth clients.
Private Equity Firms: Firms involved in startup investments might offer pre-IPO opportunities.
Employee Options: If you’re an employee of a company going public, you may receive options or shares at an early stage.
Should a Layman Investor Invest in Pre-IPO Shares?
While pre-IPO investments sound promising, layman investors should proceed cautiously. These investments can offer high rewards, but they are also risky and require patience. If you’re new to investing, it’s essential to assess your risk tolerance and consult with a financial advisor. As the saying goes, “Don’t put all your eggs in one basket.” Diversifying your portfolio and being mindful of the potential risks is key.
Pre-IPO investments can be an exciting opportunity, providing access to a company’s growth before it becomes publicly traded. However, these opportunities come with risks that may not suit all investors, especially those unfamiliar with the stock market. It’s wise to do thorough research or consult with an investment professional before taking part in such investments.
