A pre-initial public offering (IPO) placement is a private sale of large blocks of shares before the stock is listed on a public exchange, the buyers in a pre-IPO placement usually get a discount from the price stated in the prospective for the IPO.
From the viewpoint of a young company, a pre-IPO placement is a way to raise money before going public. It also is a way to offset the risk that the IPO price will prove to be optimistic and the price will not go up immediately after it opens.
Not many individual investors take part in pre-IPO placements. They are generally restricted to high-net-worth individuals and sophisticated investors. The company, however, does not want these private buyers to immediately sell all their shares if their stock soars once it opens on an exchange. To prevent this, a lock-up period is generally attached to the placement, preventing the buyer from selling shares in the short-term.
Plenty of investors were excited about the impending IPO of Alibaba Group, the e-commerce conglomerate based in China, when it announced it would be listed on the New York Stock Exchange as BABA in September 2014. In advance of its public debut, Alibaba opened up a pre-IPO placement for large funds and wealthy private investors. One of the buyers was Ozi Amanat, a venture capitalist based in Singapore. He purchased a block of $35 million worth of pre-IPO shares at a price below $60 per share and then allocated the shares among Asian investors who had ties to his fund, K2 Global.
On its first day of public trading, BABA closed just below $90 per share. As of the start of November 2019, it was trading at above $176 per share.
You might suspect that Alibaba’s management regretted that pre-IPO placement. However, the money paid by Amanat and other investors ensured that the company had adequate funding before its IPO. It also mitigated the risk for Alibaba that the IPO would not be as successful as the company hoped, and lastly, it certainly worked out well for Amanat’s clients.
There are many reasons why high net worth and sophisticated investors have turned to Pre-IPO opportunities in the last few years.
Barriers to entry have been reduced, they can invest from just a few thousand pounds.
By investing at the earliest possible stage of the companies life, the potential for growth is highest.
In certain circumstances investors can get the stock at a discount to its potential IPO price.
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