Introduction
Why do Investors often hype about PRE-IPO shares, but hesitate when it comes to liquidity?
PRE-IPO investments are limited, but the potential upside is tremendous. It’s this potential that often draws investors in. But let’s not fool ourselves, liquidity is a massive headache. Unlike the public shares you could dump in seconds, these private stakes can keep your money under wraps for what seems like eternity.
So what is the practical playbook for investors who would like to make those theoretical gains real gains? In today’s private markets, where companies are grazing on junk term sheets and treating the public markets as if it’s a mythical place where you go to raise your last round, strategic planning is key. You need a plan. No plan? No payout.
The Liquidity Barriers for pre-IPO Investors
- Lack of Transparency: Most pre-IPO companies are private and don’t need to distribute quarterly earnings or disclose material events, so there’s no way for an investor to determine actual performance.
- Stock Pricing Problem: Because pre-IPO shares are not listed on an exchange, their value is more subjective, relying on private transactions, conversations with brokers, or a single private sale to assess fair value, and investors frequently disagree on value.
- Limited Exit: Investors have limited ability to sell their holdings, unlike public markets, and exits depend on IPOs, takeovers, or finding a private buyer with broker assistance.
- Long Term Hold: Pre-IPO shares can lock up capital for years due to limited buyers and sellers and the extended time for transactions to clear.
- Limited Number of Buyers & Sellers: Pre-IPO investments have fewer participants than the listed markets, which impacts the ability to execute large transactions and keeps the liquidity thin.
Strategies to exit Smartly:
Let’s go through the primary exit options, with real-world success (and failures) stories.
- Acquisition by a Larger Company
When a larger company knocks on the door, an investor sees an opportunity where premium valuations and faster exits are at hand.
- The Initial Public Offering
When it comes to exit options, the IPO is still the gold standard. Once the company is public, the investor has liquid shares in the company that can be traded on the exchange, providing a secure and confident exit strategy.
- Secondary Sale of Shares
Selling your shares to a larger fund or Venture capitalist in a later round. You may not be getting the peak valuation of the company, but it’s still a good exit.
- Founder Buyback
Profitable startups sometimes buy back shares- it’s mutually beneficial.
- Liquidation or Sale of Assets
Sometimes things don’t go as planned. If the company goes out of business, liquidation is a way of recovering a portion of its capital.
Factors to Keep in Mind Before Exiting
Not every exit is equal; here are the considerations for investors:
- Stage of Startup: Early-stage investors may prefer secondary sales; those in later rounds may prefer an IPO or acquisition.
- Investor type & stake: Major investors control exit decisions; smaller investors tend to follow.
- Market Conditions: A robust market presents IPO opportunities; in more challenging times, secondary sales make more sense.
- Alignment with Founders: Investors should have discussions with the founders about their expectations regarding an early exit to avoid any potential grappling or friction.
- Legal and Tax: It is essential to note that in India, capital gains taxes and compliance requirements may have a significant impact on investors’ net returns.
Conclusion
Pre-IPO investing is still one of the best ways to build wealth, as long as you think through how you plan to exit. Each method, IPO, secondary sale, acquisition, and buyback, has its own timing and risk. Don’t let your capital go stale.
At Equentis Investech, we assist investors in navigating both timing and liquidity challenges through detailed market research, access to secondary deals, and strategic advice. Our expertise and network can help you identify the right exit strategy and execute it effectively. If you are serious about realising value in your pre-IPO holdings, it makes sense to have the right partner.
Ready to make your exit? Choose wisely, act strategically – don’t leave your returns to chance. If you’re interested in learning more about how we can help you navigate the challenges of pre-IPO investing, contact us today.
