A pre-Initial Public Offering (IPO) placement involves the sale of blocks of shares before the stock is listed on a public exchange. Because of the risks involved and the size of the investments, investors in pre-IPO shares usually get a discount from the IPO price. For the company, this is a way to offset the risk just in case the IPO will not be as successful as hoped.
In recent years, the average time taken for a tech startup to go from a founding event to trading on the public exchange has increased a lot since the dot com bubble burst in the 2000s. Adding these late-stage, pre-IPO positions to your portfolio makes sense when you are looking for long-term wealth creation. Here are 5 reasons how you can benefit from investing in pre-IPO shares:
1. The likelihood of extremely high returns
Most companies in India offering pre-IPO shares allow their investors to buy unlisted shares as far as 18 months before being listed. During this early phase, the price of the share is quite low and has the potential to generate huge profits in the long run. One such example is the pre-IPO shares of the ICICI Lombard General Insurance. They were available at Rs. 460 per share and are expected to list at a much higher rate.
2. Late-stage investing increases returns with shorter holding periods
One way to decrease illiquidity is to invest in late-stage companies with a clear path to becoming public. Some of the most recent IPOs have delivered outstanding returns in extremely short time frames between their last private round of funding and their liquidity event when going public.
3. Low allotments
In India, good IPOs get oversubscribed by 30x-50x. In fact, retail investors hardly get any shares before listing. Once the company is listed, prices usually end up being overvalued. Therefore, it makes sense to invest in pre-IPO shares.
4. Nykaa, Barbeque Nation Hospitality, Bajaj Energy, and other big private companies are likely candidates for IPO in 2021
It is widely known that some of the world’s most recognized brands are still privately held corporations. Their IPOs are some of the most anticipated financial events of the coming year. Usually, access to these companies’ stocks has been limited to a select few people and was mostly exclusive to the VC community. However, recent players like Unlistedkart are offering investors the ability to get in on these opportunities before they are available in the public markets.
5. Secondary market platforms make it convenient than ever to invest in pre-IPO shares
Companies like Unlistedkart are bringing access and liquidity to new investors who are seeking opportunities in privately-held organizations. This market, which was once inaccessible, has turned into a pretty efficient one, with additional visibility and transparency of its inner workings. So get in early, ride the wave, and enjoy extraordinary returns with the next cohort of technology companies before they go public.