Investing in a public or a private limited company before it is comes out with an initial public offering (IPO) and gets listed on a stock exchange is called Pre-IPO investing. When a company comes out with an IPO its shares are available for subscription and it starts trading on a stock exchange. So, in case of pre-IPO investing a company’s shares are bought before it is available for public subscription. While earlier only the big investors like hedge funds or large mutual fund companies were involved in the pre-IPO investment platform, today any one can invest in a pre-IPO.
How does Pre-IPO Investing work?
All of us are familiar with IPO investing. A company which wants to go public and get listed on a stock exchange issues a prospectus to attract the investors. An interested investor can get the prospectus through a broker or online, fill the application form mentioning the number of shares he/she is interested in subscribing and submit it along with the money for the shares. The payment can be made in the form of a cheque or online.
In the case of Pre-IPO, the shares can be usually bought 3-18 months before the company gets listed. There is usually no prospectus. Since there is no guarantee of the price at which the share will get listed or even if the listing will occur at all there is a huge risk for pre-IPO investors. To compensate for this, the Pre-IPO shares are offered at a substantial discount to the expected IPO price. Also there is a lock-in period which is the stipulated time during which the pre-IPO investors cannot sell their shares. As per SEBI guidelines, pre-IPO investors cannot sell their shares for one year from the listing date. This lock-in period ensures that the investors do not manipulate the share price after it is listed.
Funds investing in pre-IPOs are increasing as they are today considered a profitable investment avenue. Retail investors do not get much information on the pre-IPOs as they are usually offered to wholesale investors, mutual funds, high net-worth individuals. So it is important to have the right business connections to get information about the upcoming lucrative deals. Stockbrokers or Advisory firms specializing in pre-IPO shares can also guide here. One can also invest in pre-IPOs through online start-up platforms.
From the company’s point of view also pre-IPO capital comes to its aid in the start-up and early stages when it needs funds for growth and expansion. Pre-IPO investing is also sometimes called angel investing or first stage funding.
How to Pick the Right Pre-IPO Opportunity
If the right stock is picked, pre-IPO investing can bring huge windfall gains to the investors. The devil however lies in the details. Which start-ups can make for good pre-IPO stocks?
- Study the companies: It is important to study the company to see if it a good pick for a pre-IPO. Companies with growth rates of over 15%, energetic management teams, strong gross margins, a scalable business model generally make great choices for pre-IPO investment.
- Seek Help: Investors who do not have experience in investing and trading stocks can seek advice from investment brokers and advisory firms which specialize in pre-IPO placements.
- Building a Good Business Network: A good network can help to know about profitable pre-IPOs.
Takeaway
If you are interested in investing in an IPO, you need be proficient enough to do a market research and analysis. Teaming with an IPO advisory expert can help you estimate the long term value of your investment and escalate your possibility for a mighty win. Need help with your first IPO investment? Call us at +91 8527853048 for a free one-to-one consultation.
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