The reasons are two-fold: the focus on profitability has become key criterion investors now seek for new-age start-ups looking to get listed. Secondly, due to reducing liquidity scenarios, public markets have started to give a far lower multiple to such businesses.
Both reasons have forced the likes of PharmEasy, BoAt, and more to delay their planned IPOs, and they have gone back to raise money from their existing institutional investors.
Down rounds (raising capital at a valuation lower than at which the company raised in the last round) have become common.
On the other hand, many “unicorns” that got listed in 2021 and early 2022 are bracing for a large supply of stocks hitting the market for sale by existing investors as their pre-IPO lock-ins get over.
A report suggested that shares worth approximately Rs 80,000 crore in value will be free from lock-in starting from November and a supply of shares over Rs 20,000 crore in value from investors in these companies can hit the market in the next two months.
With changing dynamics of the IPO market, it is a double whammy for many of the HNIs, as many of the pre-IPO companies where they invested have delayed or cancelled their plans for listing.
The ones that already got listed have seen their prices being eroded substantially, as can be seen here.
So, the exit has become farfetched, and liquidity is impacted due to that. This has brought back the focus on risk management and deeper due diligence for HNIs while looking to invest in unlisted companies through pre-IPO shares.
While there are indeed advantages of investing at a stage when the company is getting ready for IPO in the coming near future, many times, it is difficult to achieve a fair price discovery in such pre-IPO deals as the information available is limited and illiquidity is another significant risk.
Also, if, for some reason, the investor has to sell shares in the unlisted markets, the tax treatment is quite different from the shares acquired and sold on stock exchanges.
Hence, an HNI should use pre-IPO shares only to add themes that are not available in listed markets (an example could be a sports franchise like Chennai Super Kings, which is a direct play on IPL) or when a very attractive deal on valuation is available (otherwise, it’s difficult to make money, just to correlate, for an HNI who bought
at Rs 2500 in private markets before IPO, the stock price now has to go up by 4X before he breaks even on his capital).
The overall cap for pre-IPO investments should not be more than 5%-10% of the portfolio to keep the risks under check. Asset allocation and proper due diligence, however, boring they may sound, are the defining factors for a portfolio’s performance.
(The author is Director and Co Founder, Valtrust)
