What is Pre-IPO Placement
A pre-IPO placement occurs when a portion of an initial public offering (IPO) is placed with private investors right before the IPO is scheduled to hit the market. Typically, private investors in a pre-IPO placement are large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price.
BREAKING DOWN Pre-IPO Placement
Pre-IPO placements only occur when there is high demand for an imminent IPO. This is because the placement's price per share, and its risk, is contingent on the company eventually going IPO and the trading volume it is able to generate. So, pre-IPO placements compensate for that risk by offering a price per share that is much lower than it is expected to be at IPO. The risk arises when the post-IPO demand is lower than the expected demand, decreasing share price.
However, if the demand increases post-IPO prices, it may seem like these private equity and hedge funds would be able to turn around and sell the shares at a higher price right away. To stop this from happening, there is generally a lock-up period attached to the placement. This lock-up period prevents these funds from selling the shares in the short term and tends to attract investors who are looking to invest in the company for the long term.
An Example of a Pre-IPO Placement
Prior to going public in September 2014, Alibaba opened up a pre-IPO placement for large funds and wealthy private investors. The company, as of June 2014, was thought to be valued as highly as $150 billion, and the demand that was already building for its eventual IPO made private investors salivate with the chance to invest in the company prior to it going public.
Ozi Amanat, an investor who manages the portfolio of billionaire businessman B.K. Modi’s Smart Global Holdings Pte., was able to obtain a block of $35 million worth of pre-IPO Alibaba shares. He allocated the shares among various Asian families who had ties to the fund, with each of the families gaining shares below $60 per share. Then, when Alibaba went public, the demand was even higher than expected, and those who received parts of the $35 million block of stock were rewarded with returns of at least 48%.
For Alibaba, this pre-IPO placement actually mitigated its risk. Even though share prices were trading higher on the public exchanges, the company was able to ensure that it received adequate funding before its IPO.