What is Pre-IPO

Summary

Pre-IPO investments allow investors to buy shares of a company before it goes public, often at a lower valuation, offering the potential for high returns. However, they come with risks such as limited liquidity, regulatory challenges, and valuation fluctuations. While some companies deliver strong post-IPO gains, others may underperform, making thorough due diligence essential. A well-diversified approach and a long-term perspective can help mitigate risks and maximize returns.

What is Pre-IPO investment?

The stock market is divided into 2 parts - Primary Market & Secondary Market. In the Primary Market investors buy shares directly from the company, compared to the secondary market where they buy shares from other investors.

Pre-IPO (Pre-Initial Public Offering) investment comes under the primary market & refers to the process of buying shares in a company before it officially lists on a stock exchange. That includes stocks issued by the private company (primary market) and buying from its existing shareholders like institutional investors, venture capitalists, private equity firms, and high-net-worth individuals (HNIs) & before the general public can trade them post-listing.

Purpose of Pre-IPO investment?

Companies offer Pre-IPO shares to raise capital for expansion, debt reduction, or operational growth without immediately going public. Since these shares are acquired at a discounted valuation compared to the expected IPO price, investors often see this as an opportunity for high returns.

Pre-IPO vs. Post-IPO: What’s the Difference?

The difference between Pre-and IPO companies lies in their listing on the stock exchange. Before the stock gets listed on the stock exchange, the investment is called Pre-IPO investment,  once it gets listed it’s called Post-IPO investment. Here are some key differences between the two for better understanding:-

How to Invest in Pre-IPO Shares?

There are multiple ways in which one invests in Pre-IPO shares. Here are some of them:

·       Pre-IPO Marketplaces & Platforms- New age platforms like Sharescart help in facilitating the buying & selling of unlisted shares. They allow retail investors, HNIs, and institutional buyers to access Pre-IPO stocks with lower investment thresholds.

·       Brokers & Dealers- Some stockbrokers and private equity firms deal in Pre-IPO shares, These brokers act as intermediaries to connect sellers (early investors, employees, or VCs) with potential buyers.

·       Through Venture Capital (VC) & Private Equity (PE) Funds- Institutional investors & HNIs can invest in Pre-IPO companies through VC & PE funds. These funds pool money from investors and buy stakes in high-growth companies before they go public.

·       Direct Purchase from Employees (ESOP) - Many Pre-IPO companies offer shares to employees via Employee Stock Ownership Plans (ESOPs). Investors can purchase these shares from employees looking to liquidate their holdings.

·       Via Alternative Investment Funds (AIF’s) - AIFs (Category II & III) offer Pre-IPO investment opportunities for HNIs and institutional investors. These funds pool capital and invest in unlisted companies close to IPO stage

Benefits of Pre-IPO Investing & Why It’s Attractive?

Pre-IPO investing allows investors to buy shares in a company before it goes public, often at a lower valuation. While it comes with risks, it also offers high reward potential. Here are the key benefits of investing in Pre-IPO shares:

1. Early Entry at a Lower Valuation - Shares are typically priced lower than their expected IPO price. Investors can acquire equity at a discount, increasing the potential for significant capital appreciation post-listing.

Example- NSE shares traded in the unlisted market at ₹700 in 2023, but by 2025, they surged to ₹1,870+, offering 165%+ returns before its IPO

 2. Potential for High Returns - Many startups and high-growth firms achieve higher valuations post-IPO, giving early  investors a first-mover advantage.

Example- Zomato’s Pre-IPO shares were available at ₹50, and it debuted at ₹126, giving early investors a 2.5x return.

3. Diversification Beyond Public Market - Since unlisted stocks don’t move in sync with market indices (NIFTY, Sensex), they offer a low-correlation hedge.

When listed stocks fell 11% in late 2024, several Pre-IPO stocks remained stable and gave positive returns.

4. Liquidity & Exit Opportunities - While Pre-IPO investments are less liquid, investors can exit in multiple ways: Selling shares post-IPO at a Premium, Private resale in the unlisted market, and If the company gets acquired by a larger firm.

Example- Flipkart’s early investors exited at 4-6x returns when Walmart acquired Flipkart before its IPO.

What are the Risks Associated with Pre-IPO Investments?

While Pre-IPO investments offer high return potential, they also come with significant risks that investors must carefully evaluate. Here are the key risks to consider:

·       Liquidity Risk – No Easy Exit- Unlike listed stocks, Pre-IPO shares cannot be easily bought or sold on the stock exchange. Investors may have to wait years before the company goes public or find private buyers in the unlisted market.

·       Price Volatility & Uncertain Valuations-  Pre-IPO shares lack real-time price discovery, so valuations can be subjective and fluctuate heavily. Investors might overpay for shares based on inflated expectations, leading to losses post-IPO.

·       Lock-In Period - SEBI regulations often impose a 6-month lock-in period for Pre-IPO investors post-listing. If the stock price falls during this period, investors cannot exit immediately.

Examples of some successful Pre-IPO companies-

Zomato-

·       Pre-IPO Price: ₹50-60

·       IPO Listing Price (2021): ₹126

·      Returns: 2.5x growth for early investors

Swiggy-

·       Pre-IPO Price: Rs.390

·       IPO Listing Price (2021): Rs.455

·       Returns: 16% in 1 day

Bajaj Housing Finance-

·      Pre-IPO Price: Not disclosed

·      IPO Listing Price (2024): Rs.70

·     Day-end closing price: Rs.165

·       Returns: 135% in 1 day

Mobikwik-

·       Pre-IPO Price: Rs.279

·       IPO Listing Price: ₹440

·       Returns: 58% in 1 day

Conclusion-

Investment in Pre-IPO companies is an opportunity to gain multi-fold returns and do wealth creation. However one has to analyze the associated risk and investment horizon before taking such a step. While some investments yield strong post-IPO gains, others may underperform. A strategic, well-diversified approach is crucial for mitigating risks and maximizing returns.