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Who Gets to Buy Stocks at Pre-IPO Price

Who Gets to Buy Stocks at Pre-IPO Price?

Pre IPO placement refers to the placement of a portion of the shares of the company to select investors ahead of an IPO. This pre-IPO placement is normally done to mutual funds, private equity funds, hedge funds, family offices etc. It is normally priced around the IPO price.

How is the Pre-IPO Placement Structured?

The Pre-IPO placement is not opened for the retail investors at large but only for select HNIs, family offices, mutual funds, PMS schemes etc. The idea is that you get assured allotment of a certain number of shares provided you are able to commit a large sum to invest. This pre-IPO placement is done just before the IPO and these large investors get the opportunity to exit on listing the IPO. In quite a few cases in the past, the pre-IPO placements have been quite successful in earning returns and HNI investors and mutual funds are now latching on this facility.

Advantages of Going Through the Pre-IPO Placement

Assured allocation
Unlike the normal IPO participation, this pre-IPO placement does not have any uncertainty about the allocation ratio. Investors who are willing to commit funds can get a big chunk of the issue. The price is also kept somewhere around the IPO price and that gives them an opportunity to exit the IPO on listing.

Pre IPO funds
Today there are select houses like Centrum and Indiainfoline that are offering indirect exposure to pre-IPO placements through their special funds. However, these funds have a minimum required corpus of Rs.1 crore and hence may be out of reach for most of the small and retail investors. Some of these are also designed as structures.

Institutional showcase
For the company coming out with an IPO this pre-IPO placement is a good way of showcasing the institutional and HNI interest in the stock and that leads to greater demand for the IPO. This also gives them a good justification for the IPO price and offers a basis for valuation of the IPO and guides in price discovery in case of book built issues.

Reliable source
For the HNIs and the fund managers, this offers another investment avenue which is largely reliable, assures allotment and also gives attractive returns on the IPO listing. Also institutions find it much easier selling the story to their investment committee for the IPO when the pre-IPO placement has already been done at a certain price.

Pricing benchmark
For the small and retail investors, this pre-IPO placement acts as a credible means of deciding on whether the IPO is worth investing or not. It also acts as an affirmation of whether the IPO is reasonably priced or whether it is very richly priced. It is this confidence that can go a long way in protecting the interests of the small and retail investors.

The Rising Indian Story of Pre-IPO Funds

There have been some interesting pre-IPO funds that have cropped up purely for the HNI and the super wealthy investors.

Lock-in of funds
The big issue in pre-IPO placements is the lock in period entailed. Currently, as per SEBI regulations the mandatory lock-in period is 1 year from the date of investment. After that period the investors are free to sell the shares in the open market.

Selective exemption
Alternate investment funds of Category 2 are likely to be exempted from the lock-in period. In fact, some of the pre-IPO funds are already registered as AIFs to avoid the lock-in clause of 1 year which is mandatory at this point of time.

Attractive returns
In the recent past, some of the pre-IPO funds have given returns to the tune of 25-30% returns annualized. In fact, some of the recent issues have been marketed almost like a near-assured return fund of 25%, which may not necessarily be the case.

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