Pre-IPO Placement is the process of selling large blocks of shares of the company to Large Financial Institutions, Hedge Funds, Mutual Funds houses, and HNI’s (High Net Worth Individuals) before the IPO of the company goes public. The Pre-IPO is usually done at a Discount from the IPO price to make it more appealing for investors. Pre-IPO Placement is done to reduce the risk of an Undersubscription in the Secondary market hence some part of shares are sold before the actual IPO takes in a Pre-IPO Placement to Ensure the Success of the IPO.
What is an IPO?
An IPO stands for “Initial Public Offering”, where an unlisted company gets itself Listed on the Stock Exchanges by selling some of its stake in the company to institutions, HNI, and Retail Individuals.
Pre IPO- Placements-
Pre-IPO placement is the process of selling large blocks of shares of the company before the IPO goes public. Large Fund houses, Financial Institutions, and HNI’s (High Net Worth Individuals) are allowed to participate in a Pre-IPO placement.
Pre-Ipo placements usually take place at a discount from the Issue price of the IPO to make it more lucrative to Investors.
A Retail Investor cannot apply for a Pre-IPO placement as the Block Size is too big and the Total Participants allowed for this is limited, hence large Hedge funds, HNIs, Mutual Funds, and large Financial Institutions with a high-risk appetite are the only ones who are allowed to apply for it.
Pre-IPO placements are done to hedge the risk of Under-Subscription in the Secondary market. The listing of the Equity shares largely depends upon the Market condition and the overall sentiments of Investors. Therefore a small probability of the IPO not getting Fully Subscribed and getting scrapped due to unforeseen conditions is present. To prevent such things from happening Pre-IPO placements are done to ensure that some Blocks of Shares are sold before the Public IPO takes place so that the Risk Exposure reduces for the company as well as the underwriters at the time of the IPO.
Let’s see how it works-
Company “Y” wants to go public at the issue price of Rs100 per Equity share. Now to ensure that the IPO is fully subscribed in the Secondary market the company decides to issue a small part of the total Shares to some selected Large Financial Institutions, Hedge Funds, and High Net Worth individuals at a discount of Rs 3 per equity share. In this way, some part of the total shares to be sold is already sold and it reduces the total number of shares that are required to get the IPO fully subscribed.
In this way, the overall IPO is subscribed to some extent before the IPO happens and the risk of Undersubscribtion is reduced. Also, the HNI’s and Fund Houses get the Shares at a discount in the Pre-IPO placement which makes it an attractive deal.