What Is a Pre-IPO Placement?
A pre-initial public offering (IPO) placement is a private sale of large blocks of shares before a stock is listed on a public exchange. The buyers are typically private equity firms, hedge funds, and other institutions willing to buy large stakes in the firm. Due to the size of the investments being made and the risks involved, buyers in a pre-IPO placement usually get a discount from the price stated in the IPO prospectus.
Key Takeaways
- A pre-IPO placement is a sale of large blocks of stock in a company in advance of its listing on a public exchange.
- Purchasers get shares at a discount from the IPO price.
- For the company, the placement is a secure way to raise funds and offset risks associated with the IPO.
Understanding the Pre-IPO Placement
From the perspective of a young company, a pre-IPO placement raises capital before going public and mitigates the risk of an underwhelming IPO. Often, these private sales involve institutional investors who can contribute to the company’s governance and help institutionalize it before going IPO.
From the buyer’s perspective, the share price may be discounted from the expected IPO price, although the final market price remains uncertain. Typically, the purchase is made without a prospectus and with no guarantee that the public listing will happen. The discounted price serves as compensation for this uncertainty.
Individual investors rarely engage in pre-IPO placements, which are largely reserved for high-net-worth individuals with a deep understanding of financial markets as classified by the IRS.
To prevent instant resale of shares once they are publicly listed, these pre-IPO placements usually have a lock-up period attached, restricting the buyer from selling shares immediately.
Exceptional Example of Pre-IPO Placement: Alibaba’s Story
Many investors were eagerly awaiting the IPO of Alibaba Group, the Chinese e-commerce giant, when it announced plans to list on the New York Stock Exchange as BABA in September 2014.
Ahead of its public debut, Alibaba offered a pre-IPO placement to large funds and wealthy private investors. One notable buyer was Ozi Amanat, a venture capitalist based in Singapore. He acquired $35 million worth of pre-IPO shares at a price below $60 per share and allocated them among Asian investors affiliated with his fund, K2 Global.
On its first day of public trading, BABA closed at just below $90 per share. By the start of November 2020, the trading price had soared above $276 per share.
While it might seem that Alibaba’s management missed out by setting a pre-IPO placement, the capital infusion by Amanat and others provided essential funding ahead of the public offering, significantly lowering Alibaba’s risk. And Amanat’s clients benefitted greatly from this strategic move.
Related Terms: Stock Exchange, Private Equity, Hedge Funds, Discount Rate, Lock-Up Period, Shares.
