A Deep Dive into the Potential of Unlisted Shares in Secondary Markets

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Unlisted shares are equity shares that are not traded on the regulated stock exchanges, but can be bought or sold in the secondary market through various platforms. These shares belong to public or private limited companies that are yet to offer their shares to the public, also known as pre-IPO shares. Unlisted shares offer a unique opportunity for investors to invest in companies that have high growth potential before they go public.

While established unicorns like Nykaa and Zomato have grabbed headlines, savvy investors are now turning their gaze to a broader canvas. In 2023, the healthcare and fintech sectors in the unlisted space witnessed a stunning 68% and 55% growth in traded value respectively, far outpacing the overall market’s already impressive trajectory.

Benefits of Investing in Unlisted Shares

Investing in unlisted shares has several benefits, such as:

• Multifold returns: Unlisted shares can unlock phenomenal returns, often far exceeding traditional investment avenues. Take the example of investors who had the foresight to back Tata Technologies Ltd. during its pre-IPO stage. These bold individuals took a leap of faith when investing at a premium, recognizing the company’s future potential. Fast forward to the company’s triumphant debut on the BSE and NSE in December 2023, and their holdings had transcended into a wealth-generating force. Shares soared from their initial entry price to over ₹1300 apiece, translating to a jaw-dropping 168% return on their initial investment. PreIPO investors invested at Rs.90/share in Tata Tech for three years before making a return to 1,450%. This isn’t an isolated incident. Nazara Technologies, backed by ace investor Rakesh Jhunjhunwala and a leader in the online gaming realm, has rewarded its early backers handsomely. Similarly, Five Star Business Finance, a non-banking finance company catering to small businesses and backed by global giants like Sequoia Capital and TPG, has proven to be a goldmine for its investors. These compelling examples showcase the immense potential of the unlisted market, where savvy investors can potentially strike it rich by hitching their wagon to promising companies before they hit the limelight.

• Tremendous growth: While rising internet penetration fuels established sectors like e-commerce, fintech, and healthcare, unlisted shares also unlock tremendous growth potential in emerging areas like the domestic toy manufacturing industry. Take Planify’s portfolio company in this space, perfectly positioned to capitalise on a confluence of favourable factors. Government-imposed import duties and stricter quality standards slashed foreign toy imports, paving the way for significant domestic investment. Hubs like Ludhiana and Noida boomed, propelling our portfolio company to scale and cater not just to the domestic market, but also to the burgeoning export demand. Even giants like Reliance entered through a joint venture, recognizing the potential. This perfect storm – PLI schemes, import duties, and soaring domestic demand – has undoubtedly turbocharged domestic toy manufacturing. By investing in unlisted companies in this space, investors can tap into this dynamic landscape and capitalize on the substantial returns it promises.

• Early entry: Investing in unlisted shares offers the thrill of entering a promising company at an early stage, potentially years before it becomes a household name. Imagine having hopped on the bandwagon of Mamaearth back in its pre-IPO days. Actress Shilpa Shetty, an early investor in the company, reportedly purchased shares for approximately Rs. 41 per share (as per filings). When Mamaearth finally made its market debut in November 2023, the share price jumped to Rs. 330, resulting in a staggering 700% return on her investment – a windfall of over Rs. 45 crore! While not every unlisted company will replicate Mamaearth’s meteoric rise, the potential for such outsized gains is a major draw for investors. It’s akin to planting a seed and watching it blossom into a mature tree, yielding fruits far exceeding your initial investment. However, it’s crucial to remember that the unlisted market also carries inherent risks and requires careful due diligence before venturing in. Unlike publicly traded stocks, information on unlisted companies can be limited, making it essential to thoroughly research their financials, business models, and future prospects before taking the plunge.

Future Outlook

• Redefining Success Metrics: As the financial landscape transforms, success is no longer solely measured by the traditional benchmarks of stock performance. Investors are increasingly recognising the value of unlisted shares in sculpting a portfolio that extends beyond the boundaries of convention.

• Reshaping Wealth Dynamics: The future promises a paradigm shift in wealth accumulation. Investors who embrace unlisted shares in secondary markets position themselves at the forefront of this revolution, steering towards a new definition of success—one that transcends the limitations of traditional investment avenues.

How to Invest in Unlisted Shares

Investing in unlisted shares requires thorough research and analysis of the company, its industry, competitors, and plans. Investing in unlisted shares also requires a clear investment objective, a long-term horizon, and a diversified portfolio. Investing in unlisted shares can be done through various platforms, such as:

• Online platforms: Few online platforms facilitate the buying and selling of unlisted shares in India. One of the pioneers in this segment is Planify.

• Alternative Investment Funds (AIFs): While traditional routes like brokers and dealers exist for accessing unlisted shares, a potentially advantageous option lies in Alternative Investment Funds (AIFs). These specialized funds actively invest in private companies and unlisted shares, offering investors professional management and diversified exposure to this often opaque market. Some AIFs focus solely on pre-IPO investments, potentially providing investors with early access to high-growth companies before they hit the public markets.

• ESOP Liquidation: Employees and founders: Another way to invest in unlisted shares is to buy them directly from the employees and founders of the company, who may have received them as part of their compensation or equity stake.

Conclusion

Unlisted shares are a lucrative investment option for investors who are looking for high returns, low volatility, and early entry into the next big thing. Unlisted shares can offer exposure to the emerging sectors and industries that are shaping the future of the economy and society.

However, investing in unlisted shares also involves some risks and challenges, such as lack of liquidity, information, and valuation. Therefore, investing in unlisted shares requires a careful and diligent approach, with a clear understanding of the company, its industry, its competitors, and its plans. Investing in unlisted shares also requires a reliable and trustworthy platform, broker, or dealer, who can facilitate the transaction process and provide the best prices and deals. Investing in unlisted shares can be a rewarding experience if done right.

The author is CEO & Co-Founder, Planify. Views are personal. 

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)