Many pre-IPO (Initial Public Offering) or unlisted companies buy or sell their shares before they go public. That is, before they get listed on the stock exchange. The best way to make a profit on these shares is to identify opportunities and companies before the market at large does and invest in the pre-IPO stage. Just like listed stocks, these shares are sold in Demat form and will reflect in one’s Demat account with the corresponding ISIN number. Here are 5 ways in which you can invest in pre-IPO or unlisted companies:
1. Intermediaries and Start-Ups
Several start-ups offer stocks in your Demat account with a minimum investment of Rs. 50,000 per company. This can help you own private assets in a company that you believe in. The start-up might help you look for a buyer, but you can’t be guaranteed that a sale will take place. The process involves companies asking you to pay money upfront, and the delivery taking place three days after your purchase. Please note, however, that there is always a counterparty risk. This means that while you may transfer the funds in good faith, there is no guarantee that you will get the shares. Always make sure to seek your investment advisor’s opinion before putting your money in these stocks.
2. Buy From Existing Employees with ESOPs
Perhaps an employee at a tech start-up does not want to wait for their company to go the IPO route to sell their shares. They may, instead, opt to sell the shares to third-party investors (individuals or VCs). Such transactions mean that an existing investor or a new investor is in a relationship with the company, thereby getting access to the secondary allocation. Check with your broker for such transactions.
3. Buy From Promoters Directly
A private placement is when a company sells its stock shares or bonds to pre-selected investors and institutions rather than on the open market. This is an alternative to an initial public offering (IPO). A company might choose this way of raising capital for expansion, rather than going public. There are several investment banks and wealth managers that facilitate the purchase of these private assets. Networking drives this kind of purchase and you should be aiming at a significant stake.
4. Buy PMS or AIFs, Which Pick Up Unlisted Shares
Other than retail investors, there are financial institutions running PMS (Portfolio Management Services) and AIF (Alternative Investment Funds) to pick up unlisted shares. These funds aim to capture pre-IPO valuations and to benefit from the rise in valuations that follows an Initial Public Offering. Please note that there is always a risk of the prices falling after listing. One example is when ride-hailing giant Uber, which was listed recently, lost money when it went public.
5. Equity Crowdfunding Platforms and Angel Funds
In this option, individuals can invest in a new business venture in exchange for common or preferred equity.