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
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.
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
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
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.
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.
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