Pre-IPO funds are funds that invest in late-stage companies looking to go public (list on the public stock exchange) in the near future. These funds typically invest in private companies that have already raised capital from private investors and have a proven business model with strong fundamentals.
Why Choose Pre-IPO Funds?
Retail investors typically don’t have direct access to investments in privately held companies. This is because it’s challenging for a company to manage a plethora of small-sized retail investors. This is where pre-IPO funds can play a role.
Pre-IPO funds allow High Net worth Individuals (HNWIs) and family offices to invest in a pool of privately-held and fast-growing companies that are looking to go public in the next three to five years. However, one fund manager proposes to invest right before IPO date, a crucial time for companies to raise capital for their IPO day.
Pre-IPO funds also have a distinct advantage over individual investors wherein they are not subject to mandatory lock-in of sale of shares. These investors can liquidate their holdings as soon as the company goes public, thereby reducing the time to realize their capital gains.
Who Can Invest in Pre-IPO Funds?
Pre-IPO funds are a relatively new asset class. These funds are generally launched by venture capital funds, private equity funds and asset management companies. According to guidelines, a minimum investment in these types of funds is of $50,000. Generally, HNWIs and family offices looking to invest in growth–stage companies would invest much larger amounts in pre-IPO funds. There is an option available for retail investors that don’t meet the $50,000 hurdle.
How can you invest in Pre-IPO funds?
1. Approach your financial advisor or expert to understand the various pre-IPO funds run by different funds and companies. Typically, you can only invest during a particular time period when the fund is recently launched and thus looking to raise capital from investors.
2. Go through the investment strategy and targets of the various alternatives communicated to you by your financial advisor. Generally, a fund will have a prospectus online on their website with all the necessary details on what they plan to do with your money. In case of any queries you can even schedule a call with one of the fund representatives.
How to Invest in Pre-IPO Funds?
1. Some of the things that you should keep in mind while choosing a fund to invest are factors such as:
• Risks involved
• Target returns
• Focus of investment by the fund (sector focus, company focus, market focus, etc)
• Credentials of the fund managers
• Holding period (the period after which you will get your money back)
• Historical returns of the fund, etc.
2. Once you decide on the fund to invest in, you should set up a call with the fund representative/financial advisor and ask them for the necessary steps to take it forward. There would be an application process and other legalities that you would have to complete before you can complete your investment.
3. Regularly track the activities of your investment and take updates from your fund representatives whenever you require. As they say, tracking the investment and being up-to-date is as important as making the initial investment.
What are the Risks Associated with Pre-IPO Funds?
As with any other asset class, it is imperative for investors to understand the risks associated with it.
Pre-IPO funds have the following risks involved:
In any form of investing, investors wish to buy low and sell high. Given the interest in the market as the IPO comes closer, the share comes at a premium. As multiple investors chase strong businesses, they try to outbid each other. Investors must ensure that the fund doesn’t overvalue the company.
Change in Market Sentiment
Not all IPOs are equally successful. There can be a change in market conditions and sentiment from the time of entry to the IPO event. Additionally, public investors may perceive the business differently when it chooses to go public. Hence it’s important to analyse the fund managers and their strategy to invest in companies well before you decide to park your money with them. An actively managed portfolio is one way to assure the positions are actively traded rather than held long term.
Governance and Regulatory Roadblocks
A company going public has to adhere to all requisite compliances and regulations before it lists publicly. Mid-sized companies operating in a fast-paced environment may not be adequately equipped to ensure the necessary compliance, which may lead to delays or other unexpected roadblocks. This could lead to delays or deferment of the public offering. We spoke to a fund manager who says that they are “invested in a fund that takes a position in Pre-IPO stocks a week before they list and this type of management style is what we were looking for.”
Startups or businesses that a Pre-IPO invests in are focused on rapid scalability which often hampers profitability. A lot of fund managers are private entities themselves and transparency isn’t often provided.
The primary factors driving the growth of pre-IPO funds in India are the evolving regulatory landscape and maturity of the VC industry.
The Pre-IPO market continues to grow and with over 1,000 IPOs in 2021 it makes sense to explore options with your financial advisor.