Most private companies use the conventional methods of acquiring capital that is floating their shares in the London Stock Exchange market through an initial public offer. Exciting developments show that entrepreneurs and deep pocket investors are now willing to invest in private companies through pre-IPO’S.
A pre-IPO investment refers to a situation where private companies raise funds before going to the markets and issuing the IPO itself. These investors are mainly composed of hedge funds and private equity investors who buy a large stake in the company between 6 months to one year before the company issues the IPO’s. Investors pay a lower price for the shares than in an initial public offer since they are investing their funds in a private company which has a greater risk than a publicly traded company.
Once they purchase the equity, there is a grace period in which the funds are in a lock down. The aim of this is to ensure that the company attracts not only short term investors but also those who invest for long term purposes. For a company choosing the right investors for the Pre-IPO is important as they do not want someone who will cash out at the first opportunity they get. This can give another investor the wrong opinion about the company.
One example of a company that has issued a pre-IPO is Van Diemen Mines. The company managed to attract investors with the promise of better prospects of sapphire and tin exploration in Tasmania. What attracts these investors are usually the returns as it is evident that they stand to gain twice or triple their investments if the companies go public in accordance with the initial plan. These investors are also shielded from the aftermarket volatility of prices once the company goes public.
A company that raises capital through a pre-IPO can enhance its operations, acquire bigger profit margins then give the public a better investment offer. Most of these companies have a higher valuation when they issue an IPO. Investors will pay a premium when the risk is minimized, and thus, the companies will fetch more after the IPO.
As an investor, there are fundamental indicators as to whether the venture is attractive or not. One of the ways to tell this is looking at the business plan is robust and that there is a growing market and a competitive advantage for the company. The management team should also be good at what they do. They should have a track record or success or even be respected members in the field. Ensure you also have an exit plan which will determine when to cash out.
Investment avenues for someone interested in pre ipo are many and visiting an investment company such Ernest and Young. JP Morgan among others who will guide you through the process. One is signing up for a high-risk high-return project which requires a large sum of investments and companies want deep pocket investors. Having someone, you know will also go a long way in ensuring that you can acquire investments in the company of your choice.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.