The Pre-IPO Advantage – How Early Investors Can Maximize Return

Did you know the funds raised via PRE IPO placements that occurred in H1’FY24 are three times higher than the placements that occurred in FY23? But has anyone pondered on the reason for the same? Let’s find it out together! 

Understanding the mechanics of pre-IPO

Companies often raise capital through pre-IPO before actually opening the IPO for the subscription. This opens up opportunities for investors to invest in these companies at early stages which potentially generate significant returns. People engaging in pre-IPOs are large institutional investors and HNIs with a significant investment in the company thus, they also help in the governance matters before going for IPO.

Why pre-IPO is gaining popularity?

With the increase in investment opportunities, investors are looking to broaden their investment horizons as well. Pre-IPOs are emerging as a preferable investment avenue for investors, let’s know why –

• Early access – Pre-IPO investing provides the opportunity to acquire shares of a company before it goes public. This early access is critical for capitalizing on the growth potential of promising Indian startups.

Example – Zomato, a known food delivery platform, raised up to $500 million in pre-IPO funding. This capital was raised through pre-IPO at a valuation of approximately $5.5 billion, which was significantly lower than its valuation of $12 billion after the IPO on July 2021. Today, Zomato is valued at a valuation of $32.1 billion. Early investors who participated in this round benefited from the opportunity and made substantial gains once Zomato’s stock began trading.

• Buy at a discounted price -To raise the necessary capital ahead of an initial public offering (IPO), businesses usually provide alluring discounts. This discount can result in significant profits once the company is publicly traded.
  Example – Swiggy, an Indian online food ordering and delivery platform, preparing for an IPO probably this year,, raised capital through pre-IPO at a price that was 20% down from its current valuation.

Many well-known personalities have made significant profits through investments in pre-IPO of promising startups. For example, DroneAcharya Aerial Innovations, a drone operation training, supply, and maintenance company, secured pre-IPO investments of ₹25 lakh and ₹20 lakh from celebrities Aamir Khan and Ranbir Kapoor, respectively. These investors purchased shares at an appealing price of approximately ₹54 each. Whereas, the IPO was closed at ₹155.85 on March 7, resulting in a whopping 188% return.

• Diversification – To manage a favorable risk to reward ratio, investors often invest across diverse asset classes. As pre-IPO are slightly riskier securities than their public counterparts, investing in them becomes a good diversification method. By spreading investments across various asset classes we can mitigate risk when a single security performs poorly.
• Transparency is steadily improving – Access to data on unlisted stocks is improving and thus facilitating the decision-making process. This availability of financials, market data, and competitor-related information reduces the risk of investing in pre-IPO.

Past years have experienced some successful pre-IPO. Let’s explore a few of them-

• CDSL: CDSL, a Mumbai-based central securities depository, had a PreIPO price of ₹60. After ~8.5 years, it’s now trading at ~₹2,886, generating an impressive average annual return of ~556.1%. For instance, a Rs. 10 lakh investment in CDSL, three years ago would now be worth around Rs. 4.8 crore
• Anand Rathi: Anand Rathi Wealth Limited, an Indian wealth solutions company, offered a PreIPO price of ₹267. After 3.8 years, currently, it is trading at  ~₹3600, generating an average annual return of ~327.57%. A Rs. 10 lakh investment in nand rathi three years ago, would now be worth around Rs. 1.5 crores.
• Tata Technologies Limited: Tata Technologies Limited, an India-based global engineering services company, offered a PreIPO investment price of ₹90. After approximately 3 years, the present price for the stock stands at ₹1,025, generating an average annual return of ~267.21%. For instance, if you have invested Rs. 10 lakhs in Tata tech three years ago, it now would have been Rs. 1.2 crores.

How investors can maximize returns

• Conduct Thorough Due Diligence: Conducting a thorough analysis of a company before investing in its pre-IPO stage facilitates knowing the ins and outs of the business and finding the right opportunity for them. 
• Making a sell or hold decision: To maximize their returns investor should carefully time their buy or hold decisions. If the company’s current valuation aligns with the investor’s expectations and believes that the company will grow further, the investor should stay invested in the company. Otherwise, they should sell their investments as soon as the lock-up period ends.
• Invest in multiple pre-IPOs: It is highly unlikely to generate extraordinary returns by investing in just a few IPOs. As these asset classes are relatively riskier than their listed counterparts, investors always prefer to invest in many
•  opportunities, thus mitigating risk 

Conclusion

Thus, pre-IPO is gaining traction and investors are slowly becoming more aware of these asset classes and the risks that come with it. 

Investing in pre-IPO alone is not sufficient. To generate high returns, investors must conduct thorough due diligence, understand the business, ensure alignment with their investment goals, and time their investments correctly.