Pre-IPO Placement

Subject – Economy

Context – Paytm weighs scrapping pre-IPO sale plan on valuation differences

Concept –

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, the buyers in a pre-IPO placement usually get a discount from the price stated in the prospective for the IPO.
For the company, the placement is a way to raise funds and offset the risk that the IPO will not be as successful as hoped.

From the perspective 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.
- Moreover and often, investors in these private sales are institutional investors and help the company with governance matters and getting institutionalized before going IPO.
From the buyer’s perspective, the amount per share may be discounted from the expected IPO price, but there is no way to know the price per share that the market will actually pay.
- In fact, the purchase is typically made without a prospectus and with no guarantee that the public listing will occur.
- The discounted price is compensation for this uncertainty.