Increasing interest in pre-ipo investments

More and more investors are seeking to get in earlier, i.e. investing before the actual IPO, to buy company shares at a much lower price

Usually, investment fortunes come from diversified private equity and venture capital investments where the companies are listed on the stock exchange at a later point. As the price of shares is lower, it attracts large investments by private equity or hedge funds. However, for private investors, getting access to just one company at pre-IPO price is difficult, and to spread the risk over several different companies and industries is virtually impossible.

WHY PRE-IPOS ARE ATTRACTIVE

Pre-IPO investments are when a portion of an IPO is placed with private investors right before the IPO is scheduled to hit the market. Typically, these private investors in a pre-IPO placement are large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means that the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price.

There are some great examples of highly profitable pre-IPO investments. Investors who bought shares of ReWalk Robotics at the IPO made 116%, whereas investors who got in before the IPO made 381%. Also, public investors in Facebook lost money on the IPO day, while private investors cashed in big: Bono, U2’s lead singer, made a whopping USD 43 million from his pre-IPO shares.

Due to the above-mentioned examples, some private investors specialise in pre-IPO investing, but unfortunately, getting access to these deals is very challenging: They have sky-high valuations and demand, so normally only the most prominent venture capitalists and celebrities can access them.

THE IMPORTANCE OF EARLY-ACCESS AND DIVERSIFYING

In 2014, 275 companies went public in the U.S., and thereby it was the most active year since 2000. The average IPO performance was 21% for 2014, which was above the ten-year mean, but well below the average return in 2013 of 41%. Source: Renaissance Capital IPO Intelligence

According to The Kauffman Foundation, the average return for a portfolio of early-stage investments was an astonishing 260%. Compare that to the stock market having a 12% average annual return since the Depression. These types of gains do not come from a single investment – they come from a portfolio of investments. When it comes to investing in early-stage companies, the key is to diversify – to invest in several promising private equity opportunities, rather than putting every penny into one company.

PRE-IPOS AS CROWD FUNDING FOR THE ENTREPRENEUR

At OMNIA, we find this development of more IPOs and more focus on pre-IPO investments for others than huge pension funds, hedge funds and high net worth individuals interesting and worth noticing, as it also decreases the risk of the investments.

Pre-IPOs are a great opportunity for entrepreneurs to raise capital as a form of crowd funding – a kind of Kickstarter for IPOs, due to the impressive performance for investors. However, for this to take place, we need to have easier access for the general public to pre-IPOs rather than it being an exclusive club for pension funds and high net worth individuals. At OMNIA, we are following this development with huge interest.

If you would like to read more about IPO investments and returns, you can find more information on Nasdaq.

17.11.2015