Want a slice of a promising company before it is offered to the public? Look at pre-IPO funds then. These funds invest in IPO bound companies.
Classified as category II AIF, these funds identify strong businesses due for listing. As the pre-IPO price tends to be lower than listing price, there is potential for a healthy upside. Generally, long-term stakeholders such as private equity investors, institutional investors may choose to liquidate their ownership in the pre-IPO phase to lock-in their profit. Moreover, as large shareholders (except category I and category II AIFs), cannot sell their holdings for at least one year post listing, some choose to liquidate in advance.
Typically, there are three ways to identify companies in their pre-IPPO and IPO phase. The first way is to scout for such news through media reports. Another strategy is maintaining a healthy relationship with investment bankers. They are the ones who are involved in issuance of IPOs. These banks help AIFs identify companies in their pre-IPPO and IPO phase.
Another way to identify such companies is through informal networks and have good relationships with promoters of various companies.
The category saw some traction in 2017 but has been on the backburner since then on account of higher volatility in equity markets and subdued IPO scenario.
IIFL Group launched India’s first dedicated pre-IPO fund, the IIFL Special Opportunities Fund in February 2017. The fund collected commitment of about USD 250 million at the time of the launch. The series 2 tranche of the fund collected USD 216 million in May 2017. Edelweiss Group followed suit with Edelweiss Crossover Opportunities Fund with target corpus of Rs.1,750 crore.
As per SEBI guidelines, being a category II AIF, it is a close-ended fund with minimum tenure of 3 years. Minimum investor investment in these funds is Rs.1 crore.
As these funds invest in companies, which have good near-term visibility in terms of listing, you can deploy your wealthy clients’ excess idle cash to these funds. However, do make them understand that there is a risk of the prices falling after listing. Ride hailing giant Uber, which was listed recently is a prime example of a company losing money post listing.