What is an IPO?
Through an IPO (Initial Public Offering), a company offers its shares to the public for the first time to raise capital that it may use for business expansion or debt payment. These shares can be previously held by the company management or new issue.
After completing the IPO process, the company becomes a public company, and its shares are available to trade on the formal stock exchange.
What are pre-IPO shares?
Pre-IPO shares are the stocks of a company before it goes public through its IPO. When a company decides to go public, companies need considerable funds to create a customer base. Investing in this funding is called pre-IPO investing.
Most companies sell their pre-IPO shares via a process called pre-IPO placement. Institutional investors like venture capital firms, banks, hedge funds, and private equity firms often prefer pre-IPO investments as pre-IPO shares are offered in large blocks. Retail investors can also consider these investments if there is no entry barrier or restrictions laid by the company. Experts believe that your investment in a company before it goes public can be profitable. To earn higher profits, investors can trade for listing gains or hold the stock for the long term.
Illustration
To understand how pre-IPO investing offer higher returns, look at the following illustration:
Let us say you invest in a pre-IPO company and buy 200 shares at Rs 500 per share. The company will get Rs 1,00,000 for funding its campaign. Such funding from investors may raise the IPO share price. With every funding round, the company valuation graph goes up, and the value per share also rises.
Suppose during the IPO, the company offers one share at Rs. 1,000. Here you can offer your 200 shares for selling, or if your analysis shows that the IPO will be opened at a premium, you can keep them with the long-term perspective.
Every company is expected to go public sooner or later. Therefore, when you invest in unlisted stocks of companies before IPO, and they perform well, you can book hefty profits when the company gets listed. However, pre-IPO investing needs extensive knowledge, and like other stock investments, it also involves risks. Retail investors can apply for pre-IPO shares after careful analysis.
Why You Should Consider Pre-IPO Shares
Here are the key advantages of investing in pre-IPO shares
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Huge Profit Potential
Investors look for upcoming IPOs to realize greater returns than buying their shares in the open market. You can invest in the company pre-IPO to magnify the gains by a significant margin. There are many instances when pre-IPO investors become millionaires after a successful IPO of a company, like Ali Baba and Snapchat. This is an important reason for many seasoned investors to choose pre-IPO companies. If you make an informed decision about the right company to invest in, it may offer you enormous returns on your investment.
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The lower price of pre-IPO stocks
You can offset the risk with pre-IPO stock as companies offer pre-IPO shares at a lower price than their issue price. When you make a pre-IPO investment, you do not know how the shares will actually perform after going public.
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An opportunity to build long-term wealth
Investors consider pre-IPO stocks as they are available at a discounted price and continue to add huge value to your investment. It can provide significantly high profits in the long run and help you build long-term wealth.
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Avoid stock volatility
Another benefit of pre-IPO is staying away from the huge volatility of the stock market. Pre-IPO investments are unlikely to be affected hugely by societal and economic events that trigger shifts in the market, as these shares are not listed.
Upcoming IPO Companies
In the busy IPO market, you can look at many successful IPOs. Recently, Vedant Fashions, an ethnic clothing brand, has been subscribed 2.57 times. Upcoming IPO that you can look at are as follows:
1. OYO Rooms (Oravel Stays Ltd)
Oyo Rooms, established in 2012, is a unique business model in the hospitality industry, providing services through digitally-enabled storefronts. It is one of the leading and earliest new-age tech platforms with its unique business model that has hugely contributed to the short-stay accommodation arena. Despite the global pandemic issue, the company is moving towards profitability. Its issue size is Rs 8,430 crore, including a fresh issue of Rs.7000 crores and an offer for sale (OFS) of Rs.1430 crores. The company has spent Rs 542 crore on marketing purposes. Its IPO price band may be settled for a lower valuation. Its reservation for Qualified Institutional Buyer (QIB) is 75%, Retail investors 10%, and non-institutional 15%. The raised capital will be issued for prepayment/repayment of company debts of OYO’s subsidiaries and funding its growth initiatives.
2. Delhivery
In the logistic sector, Delhivery is one of the fastest-growing new-age companies. It is a partner with numerous e-commerce platforms handling their end to end logistics services. It is serving the industry as the leading third-party Express and Heavy Parcel delivery company with a 20% market share of overall e-commerce volumes. Considering the data issued by the company, it has the largest PIN networks in the country. Its issue size is Rs 7,460 crore, including a fresh issue of Rs.5000 crores and an OFS of Rs.2460 crores. Its reservation for QIBs is 75%, Retail investors 10%, and non-institutional 15%. The raised capital will be issued for prepayment/repayment of company debts.
3. ESAF Small Finance Bank
ESAF Small Finance Bank is a small financing bank and one of the known names in the microfinance industry. It has been predominant in the small financing sector for 25+ years with a large customer base, yield on advances, AUM CAGR, loan portfolios in Agri and semi-urban areas. With 550 branches, it is serving its clients uninterruptedly. Its retail deposit portfolio graph is rapidly growing. In 2021, its total deposits were Rs.89,994.26 million. Its issue size is Rs.997.78 crore, including a fresh issue of Rs.800 crores and an OFS of Rs.197 crores. Its reservation for QIBs is 75%, Retail investors 10%, and non-institutional 15%. The raised capital will be issued for prepayment/repayment of company debts and general corporate purposes.
4. Arohan Financial Services
Arohan Financial Services is a microfinance lender. It has filed the DRHP with the SEBI. They have been the largest NBFC-MFI in Eastern India based on Gross Loan Portfolio. The lender is ready to raise Rs.150 crore through a pre-IPO placement. The issue size is Rs.1800 crores, including a fresh Rs issue. 850 crores and 2,70,55,893 equity share). Its reservation for QIBs is 75%, Retail investors 10%, and non-institutional 15%. The raised capital will be issued for prepayment/repayment of company debts and general corporate purposes.
Conclusion
Pre-IPO investment is a golden opportunity for investors to make money above typical gains in the stock market. You can find late-stage companies with a higher probability of getting listed on the public exchanges. These companies offer more value to investors and higher liquidity after listing. For short time holdings, anywhere between six to twenty-four months, you can make a good amount of money with tech startups. It is greatly proven that some tech businesses can deliver positive returns even before declaring the IPO, like Zoom and Pinterest.
RURASH is amongst India’s tech driven investment management company, providing financial solutions to augment the client’s wealth and facilitate building a legacy.
For any guidance regarding financial instruments, please reach out to us at invest@rurashfin.com or call us at +91 8591811864.
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