How to buy unlisted shares of pre-IPO companies
Pre-IPOs are basically private companies that have established a business model and income with the intention of going public to raise new capital or unleash existing shareholder value. While many investors wait for companies to be listed to start trading, there are options in which one can invest in companies before they go public and offer their initial public offerings (IPOs).
Experts believe that investing in a company before it goes public can be a profitable business, while it also has its own set of advantages and disadvantages. Also, it is important to understand how to get into it and what factors to consider. Experts suggest that investing in pre-IPO and unlisted stocks should only be done by investors with an aggressive risk attitude / profile.
Investing in pre-IPO companies helps an investor participate in the growth of a business before it goes public. Investors benefit when the company is listed because there is potential for unlocking value and benefits in a good company. In addition, it is certain to invest in a company that may see high IPO demand and therefore low / zero allocation during the IPO process, ” said Yogesh Kalwani, Head of Investments, InCred Wealth.
Investing in unlisted stocks is a high risk investment and therefore has the potential to generate significantly higher returns, as early stage investors benefit the most before the company is listed on the stock exchange. Many new age companies (e-commerce, tech, fintech, etc.) are private and their allocation will help investors diversify their equity portfolio, Kalwani added.
These days it is difficult to get an allocation in IPOs given the over-subscriptions. Investors have access to high growth companies, technology startups, which are generally not listed. In addition, the price volatility of unlisted stocks is lower than that of listed stocks, ” said Divam Sharma, co-founder of Green Portfolio.
How to invest in companies before they go public
Previously, large institutions and funds could only invest and participate in unlisted equity opportunities, but now individual investors have access to them as well. Unlisted stocks can be bought through intermediaries and platforms specializing in finding and placing unlisted stocks and can facilitate trading. Intermediaries and platforms buy shares from employees (ESOPs), existing investors and offer them to new investors wishing to invest.
Unlisted shares can be purchased on the Demat account and this is an off-market (not on-exchange) transaction between buyer and seller. Therefore, it is very important to deal with reputable / trustworthy intermediaries to avoid any counterparty risk, Kalwani said.
When selecting a company to invest, it is important to know the business model, the management team, read the annual financial performance report and company update, and understand the valuation. at current market price. “Additionally, price discovery is not efficient, so it is advisable to deal with intermediaries who can help you with company and market information and ensure stock availability,” said Kalwani of InCred Wealth.
Divam Sharma of Green Portfolio said that sometimes liquidity is an issue and investors have to deal with multiple brokers offline, where there may be a lack of transparency and confidence in the conduct of buy / sell transactions. In addition, information on companies is inferior to that of listed stocks. In addition, there is a one-year lock-up after listing for investors in unlisted shares.
Sharma presented the following factors that investors should take into account when considering investing in such companies – a) Liquidity: many unlisted companies do not attract a large number of buyers and sellers and, for example, Therefore, the ease of liquidating investments is important.
b) Fundamentals: Like a listed market, investing in unlisted stocks must take into account fundamental controls and valuation controls. Business information is generally available through certain brokers, business websites, or MCAs.
c) Company listing potential: Companies entering an IPO typically create more value for investors, have high liquidity, and can also be sold after listing. There are tax advantages because after listing, capital gains tax is lower compared to unlisted companies which are taxed on basic indexing slabs and have 3 years for LTCG, a-t -he adds.
Never miss a story! Stay connected and informed with Mint. Download our app now !!