ipo investments: The double-edged sword known as pre-IPO investments

Whereas the Indian inventory indices have climbed nearer to their lifetime highs, the IPO market nonetheless hasn’t gained the identical tailwinds.

The explanations are two-fold: the give attention to profitability has turn into key criterion buyers now look for new-age start-ups seeking to get listed. Secondly, as a consequence of decreasing liquidity eventualities, public markets have began to present a far decrease a number of to such companies.

Each causes have pressured the likes of PharmEasy, BoAt, and extra to delay their deliberate IPOs, and so they have gone again to boost cash from their present institutional buyers.

Down rounds (elevating capital at a valuation decrease than at which the corporate raised within the final spherical) have turn into frequent.

However, many “unicorns” that obtained listed in 2021 and early 2022 are bracing for a big provide of shares hitting the marketplace for sale by present buyers as their pre-IPO lock-ins recover from.

A report urged that shares value roughly Rs 80,000 crore in worth will probably be free from lock-in ranging from November and a provide of shares over Rs 20,000 crore in worth from buyers in these firms can hit the market within the subsequent two months.

With altering dynamics of the IPO market, it’s a double whammy for most of the HNIs, as most of the pre-IPO firms the place they invested have delayed or cancelled their plans for itemizing.

Those that already obtained listed have seen their costs being eroded considerably, as might be seen right here.

So, the exit has turn into farfetched, and liquidity is impacted as a consequence of that. This has introduced again the give attention to danger administration and deeper due diligence for HNIs whereas seeking to put money into unlisted firms by way of pre-IPO shares.

Whereas there are certainly benefits of investing at a stage when the corporate is preparing for IPO within the coming close to future, many instances, it’s tough to realize a good worth discovery in such pre-IPO offers as the data obtainable is restricted and illiquidity is one other important danger.

Additionally, if, for some purpose, the investor has to promote shares within the unlisted markets, the tax therapy is kind of totally different from the shares acquired and offered on inventory exchanges.

Therefore, an HNI ought to use pre-IPO shares solely so as to add themes that aren’t obtainable in listed markets (an instance could possibly be a sports activities franchise like Chennai Tremendous Kings, which is a direct play on IPL) or when a really enticing deal on valuation is offered (in any other case, it’s tough to earn a living, simply to correlate, for an HNI who purchased

at Rs 2500 in non-public markets earlier than IPO, the inventory worth now has to go up by 4X earlier than he breaks even on his capital).

The general cap for pre-IPO investments shouldn’t be greater than 5%-10% of the portfolio to maintain the dangers beneath test. Asset allocation and correct due diligence, nevertheless, boring they might sound, are the defining elements for a portfolio’s efficiency.

(The creator is Director and Co Founder, Valtrust)