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What Is Pre-IPO Fund: Benefits And Risk

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The pre-IPO Funds stand for "pre-initial public offering." These are the funds that invest in late-stage companies looking to go public or get listed on the public stock exchange such as BSE or NSE in the next 3-5 years. Companies need a lot of money to develop and build a consumer base even before they go public. Pre-IPO investment is when an investor invests in this type of fundraising.

 

Why invest in Pre IPO or how one should invest in Pre-IPO funds? The reason is profit. Because of the benefits associated with it, large private equity firms and qualified investors jump at the chance to invest in a new business prior to its IPO. However, there is also risks associated with the Pre-IPO funds.

Benefits

Benefits

High ROI

After subscribing to the pre-IPO fund, the subscriber gets the shares at a discount from the IPO price. When the IPO goes public, gets listed on the stock market, the subscriber gets a huge chunk of ROI. Pre-IPO Funds can be a good investment destination for good returns on investments.

The Growth Factor

Retail misses out on the ultra-growth period of a firm as more and more companies choose to remain private longer. Private company valuations skyrocket before they go public. You'll get the opportunity to ride the crest of the wave.

Discounted Price IPO

In India, a good IPO might be 30-50 times oversubscribed. Before a company goes public, retail investors have a hard time getting shares. The majority of the time, the price after a listing is inflated.

Big Private Equity

Any new startup's success is determined by its ability to go public through IPO on the stock market. Retail investors may only apply for a maximum of 2 lac rupees, although having significantly more money to invest whereas, in the pre-IPO fund, the investor can apply more. In India, private equity investments begin at around 2 crores.

Risks
 

Risks

The Cost of Admission

Investors want to buy at low and sell at high in any type of investment. The stock is trading at a premium due to increased market interest as the IPO approaches. Multiple investors compete to outbid each other as they seek out strong enterprises. Investors should make sure the fund does not overvalue the firm.

The Shift in Market Attitudes

Market circumstances and mood may change between the time of admission and the IPO event resulting in a bad listing. As a result, it's critical to research the fund managers and their investment strategy before deciding to put your money with them.

Governance and Regulatory Obstacles

This risk is the obvious one. It is mandatory for a firm to meet all of the necessary compliances and requirements before filing for an IPO. If a firm doesn't fulfill important requirements, then, this might cause the public offering to be delayed or postponed.

Profitability Criteria

A Pre-IPO invests in startups or firms that are focused on quick scaling, which might impede profitability. Despite the fact that SEBI has relaxed the profitability standards, major discrepancies between the current and required financials may cause the listing to be postponed. This might result in a longer than expected waiting period for investors, or possibly a loss of cash if the fund underperforms.

Conclusion

Conclusion

Pre-IPO allocation is essentially a chance to invest in a company's stock 12-18 months before its initial public offering (IPO). The upside is that you can obtain fundamentally sound shares at a decent price if you do your homework.

Investing during the pre-IPO stage can help you get the most out of a fundamentally sound stock offering. Investing without conducting the preliminary study, on the other hand, might result in a loss of capital. Experts advise doing an extensive study or consulting a financial professional before investing in a pre-IPO.

Story first published: Thursday, December 23, 2021, 21:05 [IST]
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