Initial public offerings represent a significant wealth creation opportunity for retail non-accredited investors, who are mostly barred from the lucrative, yet risky segment of early and late-stage investing.
The IPOs of ambitious, and disruptive tech companies are often quite the spectacle, with millions of investors clamoring for a piece of the stellar listing gains associated with such offerings.
In 2020, in the midst of a raging pandemic, the US markets witnessed an unprecedented boom in IPOs, with 480 new offerings during the year, an increase of 100% compared to the previous year.
On average, each of these companies posted gains in excess of 40% on their first day of trading, helping create phenomenal value for investors within a short span of time, before cooling-off in recent months.
Despite the windfall gains associated with IPOs, they are also often compared to buying lotto tickets, especially off-late, with the demand and oversubscriptions resulting in share allotments being completely random.
While anyone can apply for an IPO, with simple and easy-to-use platforms such as the SoFi Online Investing platform, or Robinhood, getting allocations requires a stroke of luck.
Enter Pre-IPO Funds
The criminal restriction of investment opportunities for non-accredited investors is almost akin to saying ‘You have to be rich, in order to get rich’, fortunately, there are some workarounds to get in on highly anticipated IPOs before the hordes cash in.
In this guide, we offer two key alternatives to get exposure to such offerings as a retail investor, without breaking any laws, while also minimizing risks.
Being qualified institutional investors, publicly traded VC and private equity firms get the right of the first offer, and most of them do invest in highly anticipated upcoming IPOs to spruce returns for their own investors.
Companies such as BlackRock, Apollo Management Group, and The Carlyle Group are a few such publicly traded stocks to invest in if you want exposure to pre-IPO investments. These companies are required to disclose their holdings in various startups, which are either in early, or late stages, and will exit their investments either fully, or partially at the time of an IPO.
Private Equity ETFs
Another significant alternative includes investing in ETFs that track shares of publicly traded private equity companies.
This makes sense because even if PE firms haven’t been involved in a particular startup or IPO since the early stages, they are likely to make the market along with other firms and institutional investors at later stages.
A blockbuster IPO that manages a significant spike in the listing will have an impact on all major holders of the stock, which includes late-stage institutional investors. The Invesco Global Listed Private Equity ETF, Proshares Listed Private Equity ETF, and the Morgan Creek SPAC Originated ETFs are a few of the options available to retail investors.
Risks To Be Aware Off
Investors need to be aware that IPO investing isn’t always sunshine and roses, and for every eSports Technologies with its over 500% jump on the listing, there are a dozen Facebooks, Ubers, and Robin Hoods that drop like a rock on listing day.
As always, retail investors must never invest money that they cannot afford to lose. It also remains important to take into account the broad-based sentiments, and other macroeconomic factors.
In mid-2020, the buoyant markets ensured every news ticker that graced the markets was off to a flying start, but things have cooled off since then, and investors will likely have to do extensive due diligence before making any type of speculative bets on pre-IPO opportunities.
Final Verdict
While there are dozens of roadblocks placed in front of retail investors, there are various workarounds and alternatives for those committed enough to find and make use of them.
With that said, risky pre-IPO investing isn’t for everyone, and by design is mainly targeted at accredited investors, with sufficient know-how of market functioning.
