Who are Valued Clients that Get Pre-IPO Shares?
Pre IPO shares are allotted to investors who can commit a large sum of money and
also have the risk appetite to wait for the lock in period of 1 year to be completed.
These are typically, HNIs, family offices, mutual funds, portfolio managers, global
investors, PE funds etc.
Why is Pre-IPO Limited to Select Clients Only
The whole purpose of a pre-IPO placement is to focus on a few investors who can
be opinion leaders ahead of the IPO. When large and reputed family offices or mutual
funds invest in an IPO they have the risk appetite to take a large placement and
also the staying power to stay invested for a period of at least one year. Also,
the company wants to reduce the cost of pre-IPO allocation as a result of which
it is restricted to as few investors as possible. Essentially, they are investors
who give a stamp of affirmation to the issue ahead of the IPO.
Five Things to Know About Pre-IPOAllotments
Exit to shareholders
Most pre-IPO placements are designed to give exits to the existing shareholders.
Typically, these will either be anchor investors or PE funds who require an exit
from the stock. The pre IPO investors need to be aware of the reasons why the anchor
investor wants to exit from the stock, just to understand the context.
Pre-IPO investments are a sort of an assured allotment which is not available in
a normal IPO. In the IPO the allocation will depend on the extent of oversubscription
over which nobody has any control as it depends on the market conditions and the
perception regarding the IPO price that is fixed for the issue.
Institutional due diligence
Pre-IPO investors who are investing in these placements needs to keep themselves
abreast of the valuations implied in the pre-IPO pricing. They are required to do
their own due diligence before committing serious funds to the issue. Otherwise,
they are likely to end up on the wrong side of the price.
Returns not assured
There is nothing like an assured return on the pre-IPO placement. While SEBI stipulates
a lock-in of 1 year as mandatory, the normal lock-in tends to be generally higher
than that. As a pre-IPO investor you need to be prepared for that and plan your
finances and your liquidity accordingly to avoid any liquidity shocks.
Exit route via IPO
The only exit route the pre-IPO investor gets is via the IPO route and that could
itself be subject to its own questions. Many times, the IPO may have to be cancelled
due to weak retail appetite or due to bad market conditions. In such cases, the
liquidity may get locked in much longer than you may have originally envisaged.
3 Mistakes to Avoid When You Buy Pre-IPO Shares
By now it is evident that pre-IPO shares are part of a “by invitation” club. It
is not open to the general public at large. Here are 3 precautions to take.
No laxity on due diligence
Ensure that adequate due diligence is done before committing investment to any pre-IPO
placement. The onus is on you as an investor to do the requisite due diligence before
investing. Look at the financials, meet the top management, talk to competitors,
do your channel checks and cross examine the news flows before investing.
Sector familiarity is key
Avoid investing in any sector that you are not familiar with. Since this is a pre-IPO
placement, it is always advisable that you stick to only those capital market stories
that you are familiar with. For example, some of the newer stock market stories
may appear to be quite fancy but if you do not understand these sectors well enough,
you are likely to end up on the wrong side.
Spread your risk
Don’t put all your eggs in one basket. When you are investing in multiple IPOs,
ensure that your overall portfolio is spread across sectors, themes and sensitivities.