Investing in companies before they go public can turn out to be a multibagger. But several investors both retail and institutional still don’t seem to be aware of how to go about investing in private equity. The key is to look out for promising, cutting-edge companies who are conducting private sale of large blocks of shares before the company floats an IPO on a public exchange.
Pre-IPO companies are privately held entities that eventually intend on being traded on exchanges. They have established business models and revenues that are geared towards listing and raising new capital that would help stakeholders realise true value.
When a company sells shares privately, it is usually hedge firms, private equity firms and other financial institutions who buy in large stakes. This is typically done at a discounted price than what is stated in the IPO, with respect to the volume of money and risk involved. The discount helps negate a possible drop in stock prices upon listiting. It usually turns out to be a win-win situation – investors reap rewards if the company lists at a higher price than what they bought the unlisted shares for. It also enables investors to particia[pte in the company’s growth.
And for young companies a pre-IPO placement means a fundraiser before going public. This acts as a safety net to offset any raised due to going public.
The company further safeguards itself from investors who would wish to sell their shares if the stock prices rally upon listing on exchanges with a lock-in period. This makes investing in pre-IPO allotments a long-term affair.
Previously, it was uncommon for private players to invest in unlisted equity opportunities. Only large funds and institutions were able to access these avenues. But as of late, retail investors have been able to buy and sell unlisted shares through intermediary platforms like UnlistedKart that specialise in curating private equity events, facilitating trade, buying Employee Stock Options, creating liquidity opportunities for pre-IPO companies and connecting unlisted companies to potential investors.
Like listed shares, unlisted shares are also about through demat accounts. But trading unlisted shares is an off market transaction that does not happen on the exchange but remains between the buyer and seller. It is extremely important that investors deal with only trustworthy intermediaries to avoid any counterparty risks. Having a reliable third-party would also help making effective price discoveries and identifying market variables impacting it.
It is also extremely essential for investors to do their due diligence by thoroughly evaluating the pre-IPO company they wish to invest in. Paying close attention to the management team, annual reports to gauge the company’s financial performance, market conditions to estimate the present valuation and valuation upon listing, and any pending legal issues the company might be dealing with.
Some other factors to look at before investing would be – liquidity. Check your liquidity options with the company and ask yourself for how long you can afford to have your money locked in. The second thing to ask is when will the company list on a stock exchange. It so happens that companies that are about to list create more value for investors. There are also better tax benefits as post listing, the capital gains tax is lower than unlisted firms. Thirdly, look at all financial information of the company revenues, profits, debts, etc.
If you are interested in investing in unlisted shares, get in touch with Unlistedkart. We’ve created a vast ecosystem of pre-IPO and new-age companies for HNI, investors, and retailers to create wealth. And if you are a company seeking liquidity for ESOPs, we could add you to our network of potential buyers to help you grow your business.