There are two reasons for this: A focus on profitability has become a key criteria that investors are now looking for in new-age startups looking to go public. Second, due to falling liquidity scenarios, public markets have started giving such companies a far lower multiple.
Both reasons have forced companies like PharmEasy, BoAt and others to delay their planned IPOs and have fallen back to raise money from their existing institutional investors.
Down rounds (raising capital at a lower valuation than the company raised at in the previous round) have become common.
On the other hand, many “unicorns” that got public in 2021 and early 2022 are gearing up for a wide supply of stocks to hit the market to be sold by existing investors if their lock-ins expire before the IPO are over.
A report indicated that shares worth around Rs 80,000 crore will be free from lock-in from November and an offering of shares worth over Rs 20,000 crore will be launched by investors in these companies in the next two months could.
Given the changing dynamics of the IPO market, this is a double whammy for many of the HNIs as many of the pre-IPO companies they have invested in have delayed or canceled their listing plans.
Those already listed have seen their prices drop significantly, as seen here.
So the exit is far-fetched, and liquidity will be affected as a result. This has brought the focus back to risk management and deeper due diligence for HNIs as they seek to invest in unlisted companies via pre-IP stocks.
While there are indeed advantages to investing when the company is preparing for an IPO in the near future, determining a fair price for such pre-IPO deals is often difficult due to the limited information available and being illiquid is another significant risk.
Even if for some reason the investor has to sell Shares on unlisted markets, the tax treatment is quite different from Shares bought and sold on a stock exchange.
Therefore, an HNI should only use Pre-IPO shares to add topics that are not available on listed markets (an example could be a sports franchise like Chennai Super Kings, which is a direct play to IPL) or when it comes to a very attractive valuation deal is available (otherwise it’s hard to make money just to correlate, for an HNI who bought
at Rs 2500 in the private markets pre-IPO, the share price now needs to rise 4x before breaking even with its capital).
The total pre-IPO investment cap should be no more than 5% to 10% of the portfolio to keep risks under control. Asset allocation and proper due diligence, as boring as they may sound, are the determinants of a portfolio’s performance.
(The author is a director and co-founder of Valtrust)
https://economictimes.indiatimes.com/markets/ipos/fpos/the-double-edged-sword-called-pre-ipo-investments/articleshow/95316974.cms ipo investments: The double-edged sword called pre-IPO investments