What Is Pre IPO?

An initial public offering (IPO) is the procedure of releasing new shares of stock to the public for the first time in a private firm. A corporation can raise equity funding from the general public through an IPO.

Before a stock is placed on a public exchange, substantial blocks of shares are sold privately through a pre-initial public offering (IPO) placement known as a Pre-IPO. Private equity companies, hedge funds, and other institutions eager to purchase sizable interests in the company are frequently the buyers. The purchasers in a pre-IPO placement typically receive a discount from the price specified in the prospectus for the IPO due to the scale of the investments being made and the risks involved.

How do you value pre-IPO shares?

In contrast to publicly traded shares, the value of your pre-IPO shares is probably determined by the most current estimate of your company’s fair value rather than by a reasonable market price. Here are a few steps on how pre-IPO shares are valued.

Step 1 – Give lead investment bank relevant financial details

Hand over to the lead investment bank all the relevant financial details. It also covers the product development pipeline, major client categories, business conditions, realistic estimates, and historical operating performance.

Step 2 – Calculate company’s worth

Calculate your company’s worth. To determine the present value of future net income using a discount rate, you may utilise discounted cash flow modelling. Sales less operating and non-operating costs equals net income. The risk-free rate and the discount rate may both be used.

Step 3 – IPO size

Decide on the IPO size. According to research, several variables are involved, including demand and the issuing company’s finance requirements. Increase the IPO size, for instance, if demand is high to make the price reasonable for more investors and raise more money. Your particular needs for the money may come into play. If your needs are minimal, for instance, choose a smaller IPO.

Step 4 – Determine value per share

Do the calculation to determine the value per share, which is the company’s worth divided by the number of shares. For instance, if a corporation holds an initial public offering (IPO) with a share size of 1 million shares, or 100% of the company, the value per share is $10, or 10% of $1 million.

Step 5 – Set up offering price per share

Establish the offering price per share, which may differ from the value per share in both directions. According to research, investment banks aim for an offering price of roughly $15 to make the shares appealing to more investors. Perception is affected by the share price. This means that investors may believe that the company’s fundamentals are flawed if you set the price too low. However, should you set the price too high, you might not be able to attract enough investors.

Advantages of Pre-IPO

Pre-IPO investing brings advantages that are challenging to match in other investment markets.

1. Possibility to accumulate long-term wealth

One of the main advantages of pre-IPO investing is that you are investing in a business that is gaining momentum. Building long-term wealth may be facilitated by your investment in a firm at the pre-IPO stage. Long-term profits from the company’s expansion can be significant if it operates profitably. Particularly in the tech sector, it is typical for startups with just a few million dollars to grow into publicly traded businesses with billions of dollars in revenue.

2. Pre-IPO shares can be purchased for less money.

You don’t know how the firm will fare once it becomes public when you invest in pre-IPO stock. Private businesses typically sell pre-IPO equities at a loss to offset this risk. For instance, a corporation may offer pre-IPO shares at $10 per share if it decides to price its initial public offering at $20 per share. This enables you to invest at a lesser cost, which will probably result in a profit even if the IPO is not very successful.

Investors who purchased the company’s shares at $20 per share will lose money if the share price abruptly drops below $15 per share. Since you only bought $10 per share, you will be less impacted by the decline in the share price. As opposed to someone who invested in the firm’s IPO, you will receive significantly more returns on your investment if the company performs well and its share price rises dramatically.

3. Potential of obtaining exponential growth

You can receive significant returns on your investment if you choose the correct firm at the appropriate moment. The primary justification for pre-IPO investment by many seasoned investors is this. The majority of technology stocks have significant upside potential on the stock market. Even if it is evident that early investors gain the most before the company goes public, you may now join in on the excitement.

Pre-IPO Placement Example

One of the most frequently mentioned examples of a pre-IPO placement and success is the Chinese multinational Alibaba Group, which went public in 2014. Before coming public, Alibaba offered high-net-worth individuals and investment firms pre-IPO shares (for less than $60 per share). When the e-commerce giant announced that it would list as BABA on the New York Stock Exchange in September 2014, many investors were eager to learn more about the upcoming IPO.

Alibaba allowed huge funds and affluent private investors to participate in a pre-IPO placement before the company went public. Ozi Amanat, a venture entrepreneur, headquartered in Singapore, was one of the purchasers. He paid less than $60 for a block of $35 million in pre-IPO shares, which he subsequently distributed to Asian investors connected to his fund, K2 Global.

A few months later, Alibaba made its stock public in the most extensive worldwide IPO. On the first day of trading, the share price of Alibaba surpassed $90. It made it possible for investors like Ozi Amanat and others to get a 50% return on their money in a short period.

Pre IPO advisory services

A privately held business can become publicly listed through an initial public offering (IPO), making its stock available for trading on a stock exchange. The SEA Capital, with expertise in pre-IPO advisory services, offers qualified counsel and advice to clients seeking an IPO listing. 

The following tasks are part of their scope of work and are crucial for a successful application for an IPO listing:

A Pre-IPO Analysis

Evaluation of quantitative and qualitative tests as part of a pre-IPO review of the company’s financial performance, noting potential compliance issues and offering solutions.

Income Road Map

Helping to create, implement, and monitor a financial road map.

Pre-IPO monitoring

By holding periodic meetings with the management team, you may coordinate and keep an eye on the developments of your listing application and pre-IPO fundraising.

Employing a seasoned independent counsel to represent a business’s interests during this frequently confusing process is highly beneficial for businesses looking to raise funds for the first time from the public capital markets.

To learn more, check out this page 

Pre-IPO checklist

Anyone considering an IPO may assess their preparation for the process using the pre-IPO checklist below.

• What tips do various investment banks have for the procedure?
• Why did your company decide to go public?
• Is there a more economical way to raise this money?
• Is it possible to list directly?
• How long will it take for this process to be completed?
• What will it cost in terms of consulting fees and internal restructuring?
• Is now the ideal time for an IPO on the market?
• Are you realistic about the valuation you hope to obtain at the IPO?
• When picking an investment bank to support the IPO, what factors are we considering?
• Exist any warning signs from the recent past that could jeopardise this process?

Pre-IPO Diagnostics In Malaysia

A Pre-IPO Diagnostic is a position analysis of the firm that focuses on how prepared it is to start the IPO process. The management will be able to balance the advantages and disadvantages of moving forward with the IPO exercise because this is also the most affordable approach for a company to understand. Most firms anticipate doing this job in 2 to 3 weeks, primarily because of courses that include checklists and recordings of interviews.

The Pre-IPO Diagnostic covers these three areas:-

• Gap analysis against needed minimum criteria (marked to market)
• Current state/position of the company
• How far can the business go to meet its required objective expectation

External Diagnostics

• Industry trend – Review the industry trend to see if the business is in a sector that is expanding or declining. This greatly influences the appetite of the investors.
• Competition – It contrasts the company’s sustainability and growth potential with some of its main rivals.
• Valuation – Calculate the value multiplier (“P/E ratio”) that this firm would plausibly attain if it pursued the IPO exercise by conducting a desktop peer review, mainly if there are rivals who are already listed on the stock exchange.

Internal Diagnostics

• Budgeting and forecasting – To examine if such systems exist, the variance analysis and reconciliation procedure, and the degree to which the staff diligently uses such techniques.

• Financial reporting procedures – To assess if reports are submitted on time, whether financials and management accounts are prepared in compliance with accounting rules, and whether the appropriate disclosures are made.

• Operational and financial control – Examine the presence of a robust internal audit team, the approval procedures’ effectiveness, and the IT systems’ suitability.

• Group structure – To evaluate transparency, related party relationships, tax efficiency, and whether a more efficient group has to be created.

• Corporate governance – To evaluate the existence and performance of the audit committee as well as the effectiveness and efficiency of the board of directors.

• Historical financial results – Based on the audited financial accounts, analyse the performance history, trends, management data, and critical transactions. Before the year of the IPO exercise, it is typical to analyse the results for the last three years of audited financial statements.

Differences between pre-IPO audit and pre-IPO diagnostic 

While both pre-IPO diagnostic and pre-IPO audit involve assessments conducted before an IPO, they are not necessarily the same thing.

Pre-IPO Diagnostic: Refers to a comprehensive analysis of various aspects of a company’s operations, financial health, and readiness for an IPO. It aims to identify strengths, weaknesses, opportunities, and threats to help the company make informed decisions.

Pre-IPO Audit: More focused on financial and accounting aspects. It involves a detailed examination of a company’s financial statements, internal controls, and other financial reporting processes to ensure accuracy and compliance with regulatory requirements.

While there may be some overlap, the diagnostic is generally broader and strategic, while the audit is more specific to financial and accounting practices. Companies often use both processes to ensure a thorough evaluation before going public.

As a Pre-IPO investor, how to invest and buy pre-IPO Stock?

The risks and potential limitations for pre-IPO investors are substantial. Thus, understanding how to invest in pre-IPO is crucial to navigating this landscape. You must carefully research the firm and ensure you want to invest. There might not be pre-IPO shares available for every company going public. 

These three methods below will help you locate and participate in pre-IPO investment opportunities.

1. Purchase pre-IPO shares directly from businesses

Putting yourself in the position of an angel or venture capitalist is one strategy for purchasing pre-IPO equities. You can buy stocks if you give a startup early-stage funding. You stand to make fantastic returns if the company eventually conducts an IPO. You can also choose to purchase pre-IPO shares from private equity firms. Here are a few methods for acquiring pre-IPO stock directly from businesses.

• Initiate contact with accountancy firms, non-banking financial institutions, and banks. Ask if they know any private businesses that intend to issue pre-IPO stocks.

• Register with services that turn pre-IPO stocks into tokens based on the blockchain. Anytime you wish, you can exchange these for cash.

• Attend startup pitch competitions and events, and search for prospective businesses to invest in. Additionally, attending these events is an intelligent approach to networking with seasoned investors and business insiders.

• Register with crowdfunding websites so you can make direct investments in new businesses.

• Observe the news. Set up email alerts to learn about businesses that are looking for funding and want to go public. Ask them directly if they are willing to supply pre-IPO stocks by getting in touch with them.

2. Use a knowledgeable broker

In pre-IPO trades, brokers and financial advisors frequently participate. They might represent sellers looking for buyers or have purchased equities they are eager to sell. Use a broker who specialises in pre-IPO sales or inquire with your present broker regarding pre-IPO stocks.

3. Purchase indirect pre-IPO shares

Due to the strict investor qualifications, low investment minimums, and inherent dangers of directly investing in private companies, purchasing pre-IPO equities appears intimidating. Consider investing in pre-IPO companies if you don’t fit those requirements or the risk is too significant for you but you still want some exposure to the pre-IPO market.

There are two methods to achieve this: publicly traded venture capital companies and private equity exchange-traded funds.

Summary 

A pre-IPO placement is viewed from the standpoint of a fledgling firm as a strategy to raise money before becoming public. It also reduces the chance that the IPO price will turn out to be overly optimistic and that the price will not rise immediately. In addition, institutional investors frequently participate in these private sales and assist the company with governance issues and institutionalisation before an IPO. You can always go through a leading private equity (PE) firm to do your bidding for you or to learn more about pre-IPO.