Should Investing in PRE-IPO be Your Next Buy?

Investing in a company before it goes public, or pre-IPO investing, is a lucrative opportunity for investors who want to get an early stake in a promising business. Pre-IPO investing can offer higher returns than investing in the same company after its initial public offering (IPO), as well as the chance to be part of the company’s growth story from the beginning.

However, pre-IPO investing has risks and challenges. It requires thorough research and due diligence of the company, its financials, market potential, and valuation. It also involves a longer lock-in period, lower liquidity, and higher uncertainty than investing in listed stocks. Moreover, pre-IPO investing is not easily accessible to everyone, as it is mostly done through brokers, fund houses, or private equity firms.

Benefits of Pre-IPO Investing

Pre-IPO investing has several advantages over investing in the same company after its IPO, such as:

• Higher returns: Pre-IPO investors can buy shares at a lower price than the IPO price, which means they can enjoy a higher profit margin when the company lists publicly or gets acquired by another entity.

• Early access: Pre-IPO investors can get access to high-growth companies that are not yet available to the public, and benefit from their future potential. For instance, some of the most successful companies in the world, such as Facebook, Airbnb, and Uber, were once pre-IPO companies that offered huge returns to their early investors.

• Diversification: Pre-IPO investing can help investors diversify their portfolio and reduce their exposure to market volatility. Pre-IPO companies are less affected by the fluctuations of the stock market, as they are driven by their own performance and growth prospects.

Recent High Return Pre-IPO Investments

Some of the recent examples of high-return pre-IPO investments are:

• Anand Rathi Wealth Limited, a wealth management firm, launched its IPO in December 2021 at a price band of ₹530 to ₹550 per share. The pre-IPO investors, who bought the shares at around ₹300 per share, made a whopping 83% return on the listing day when the shares opened at ₹550 and closed at ₹549.95. Today, share is trading in the range of ₹2,500 – ₹2,600.

• Bikaji Foods International Limited, a manufacturer and marketer of ethnic snacks, launched its IPO in November 2022 at a price band of ₹285 to ₹300 per share. The pre-IPO investors, who bought the shares at around ₹200 per share, made a handsome 50% return on the listing day when the shares opened at ₹300 and closed at ₹299.95.

• Tata Technologies Limited, a global engineering and product development digital services company, launched its IPO in November 2023 at a price band of ₹475 to ₹500 per share. The pre-IPO investors, who bought the shares at around ₹90 per share, made a stunning 1,400% return on the listing day when the shares opened at ₹1,250+.

Factors to Consider Before Investing in Pre-IPO

Before investing in a pre-IPO company, investors should consider the following factors:

• Company Management: Investors should do comprehensive research and analysis of the company, its products or services, its target market, its competitive advantage, its growth potential, and its risks and challenges. Investors should also check the company’s financial statements, such as its revenue, profit, cash flow, and debt, to assess its financial health and performance. Good management can do wonders even during bad times, however,, a good market does not assure you great returns if the management is not capable enough.

• Valuation: Investors should evaluate the company’s valuation, which is the estimated worth of the company based on various factors, such as its earnings, assets, growth rate, and market share. Investors should compare the company’s valuation with its peers and industry benchmarks, and determine if it is fair and reasonable. Investors should also be wary of overvalued or undervalued companies, as they may indicate unrealistic expectations or hidden problems.

• Exit strategy: Investors should have a clear exit strategy, which is the plan to sell their shares and exit their investment. Investors should know when and how they can sell their shares, and what are the possible scenarios and outcomes. Investors should also be prepared for any changes or delays in the company’s IPO plans, and have a contingency plan in case of any unforeseen events.

Best Ways to Find and Invest in Pre-IPO

Finding and investing in pre-IPO opportunities can be challenging and complex, but there are some ways to make it easier and more convenient, such as:

• Online platforms: Several online platforms offer pre-IPO investing services such as Planify, which provides a comprehensive holistic view of the investment opportunity. These platforms connect pre-IPO investors with pre-IPO companies and facilitate the buying and selling of pre-IPO shares. These platforms also provide information and guidance on pre-IPO investing, such as company profiles, valuation reports, market trends, and investment tips.

• Fund houses: Some fund houses offer pre-IPO AIF venture funds, such as Edelweiss, etc. These funds invest in pre-IPO companies and allow investors to participate in pre-IPO investing to have a higher diversification. These funds also manage the risk and liquidity of pre-IPO investing and handle the exit process for the investors.

Conclusion

Pre-IPO investing is an attractive option for investors who want to get an early stake in a promising company and enjoy higher returns than investing in the same company after its IPO. However, pre-IPO investing is also a risky and challenging strategy that requires a thorough research and due diligence of the company, a longer lock-in period, a lower liquidity, and a limited availability. Therefore, investors should weigh the pros and cons of pre-IPO investing, and consider the factors and ways to find and invest in pre-IPO opportunities. Pre-IPO investing is not for everyone, but for those who are willing and able to take the risk and wait for the reward, it can be a rewarding and satisfying experience.

(The author is Mr Rajesh Singla, CEO & Co-Founder, Planify. Views are persobnal.)