Pre-IPO companies are essentially private companies that have established business model and revenues with intention to list on stock exchanges to raise new capital or unlock existing shareholder value. While many investors wait for the companies to list in order to start trading in them, there are options wherein one can invest in companies before they go public and come up with their initial public offerings (IPOs).
Experts believe that investing in a company before it goes public can be a profitable activity, whereas it also has its own set of pros and cons. Besides, it is important to understand how to get into it and the factors to be considered. Experts suggest that investment in pre-IPO and unlisted shares should only be done by investors with aggressive risk attitude/profile.
”Investing in Pre-IPO companies helps an investor to participate in the growth of a company before it gets listed on the stock exchanges. Investors benefit when the firm gets listed as there is potential value unlocking and upsides in a good company, Also, there is certainty of getting invested in a company which may see high IPO demand and hence low/ no allocation during the IPO process,’’ said Yogesh Kalwani, head of investments, InCred Wealth.
Unlisted share investment is a high-risk investment and hence has the potential to deliver significantly higher returns as early investors benefit the most before the company gets listed on stock exchange. A lot of new age (e-commerce, technology, fintech, etc) businesses are private and allocation to the same will help investors diversify their equity portfolio, Kalwani added.
”These days it is difficult to get allotment in IPO’s considering over-subscriptions. Investors get access to high growth companies, tech startups, which are usually not listed. Also, volatility in the price of unlisted shares is less than that of listed shares,’’ Divam Sharma, Co-founder of Green Portfolio said.
How to invest in firms before they go public
Previously, large institutions and funds were only able to invest and participate in unlisted equity opportunities, but now individual investors also have access. Unlisted shares can be bought through intermediaries and platforms who specialise in sourcing and placement of unlisted shares and can facilitate the trade. Intermediaries and platforms buy shares from employees (ESOP), existing investors and offer to new investors who are keen to invest.
Unlisted shares can be bought in Demat account and it is an off-market transaction (not on the exchange) between the buyer and seller. Hence it is very important to deal with reputed/trustworthy intermediaries to avoid any counter-party risk, Kalwani said.
While selecting a company to invest, it is important to know the business model, management team, read the annual report for the financial performance and business update and understand the valuation on current market price. ”Also, price discovery is not efficient, hence advisable to deal with intermediaries who can help you with company and market information and ensure availability of the stock,” Kalwani of InCred Wealth stated.
Divam Sharma of Green Portfolio said that sometimes liquidity is a concern and investors have to deal with multiple offline brokers, where there might be a lack of transparency and trust in conducting buy/sell transactions. Also, information about companies is lesser than listed stocks. Additionally, there is a lock-in of 1-year post listing for unlisted share investors.
Sharma laid out the following factors that investors should look at when planning to invest in such companies – a) Liquidity: Many unlisted companies do not attract a large set of buyers and sellers and hence easy of liquidating of investments are important.
b) Fundamentals: Like a listed market, investing in unlisted shares should be considering the fundamental checks and valuation checks. Information about the companies is generally available through some brokers, company websites or MCA.
c) Potential of company listing: Companies that approach an IPO usually create more value for investors, have high liquidity and can also be sold post listing. There are benefits of taxation as post listing, the capital gains tax is lower vs unlisted firms which are taxed basis indexation slabs and have 3 years for LTCG, he added.