Back
Mon, 18 Sep 2017
Pre-IPO funds gain popularity as primary market stays red hot

For India's super-wealthy investors, pre-IPO funds appear to be the latest favorite in the long list of money-making instruments. With minimum subscription set at eight figures for some of these bespoke options, investors could buy shares even six quarters before an initial sale and re-live the startup adventure. 

The IIFL Group offers the country's first dedicated pre-IPO fund, while others such as Centrum use the alternative investment fund (AIF) to hawk the products to investors who stand to gain about 25 per cent a year. 

The IIFL AMC, a part of IIFL Investment Managers, launched the dedicated fund early this year. Christened the IIFL Special Opportunities Fund, it has collected about Rs 4,500 crore. The minimum investment is Rs 1 crore. 

"We see strong investment opportunities through this route as a large number of quality IPOs are hitting the market," said Prashasta Seth, CEO, IIFL Asset Management. "Selection of IPOs is the key to outperformance. We have taken bets on NBFCs and insurance companies that have high upside potential on a risk-adjusted basis." 

For example, IIFL Special Opportunities Fund bought ICICI Lombard General Insurance shares at Rs 460 a piece, which is expected to list at a significant premium, said a market source. The other investments included Reliance Nippon Life Asset Management. 

"Wealthy investors have spotted such opportunities as a new investment avenue to gain from the equity-market bullishness," Seth said. 

Fund managers mostly buy pre-IPO shares in the secondary market from private equity investors, who want to exit as they have already earned handsome gains. They prefer not to remain locked in further as select existing investors are not allowed to liquidate immediately on listing. 

The fund is mandated to invest four fifths of the corpus in unlisted companies that are on the verge of listing in the coming quarters. "There is an in-built margin of safety in such pre-IPO allotments given an impending IPO at a higher price," said Sandeep Nayak, ED, Centrum Broking. 

"We are investing through different routes in such funds as client demand is increasing, with many of them seeking to diversify their portfolios with another avenue for returns. The buoyancy in the markets has created interest among wealthy investors who are positive about significant long term gains." To be sure, there are risks associated with market conditions that may alter dramatically after the listing of a business. "The only risk in this investment is a drastic change in market conditions that may alter dramatically after the listing of a business. "The only risk in this investment is a drastic change in market conditions during the one-year, post-IPO lock-in period," he said. 

Centrum invests either directly or even through the secondary market route. It also deploys money raised under AIF. 

Recently, it has invested in HDFC Life Insurance, RBL and BSE. While HDFC Life is yet to be listed, the rest two bets have yielded significant returns, nearly doubling investors' money. 

"Many wealthy investors, who do not find startups exciting any more, are taking interest in such investments," said Manoj Nagpal, CEO, Outlook Asia Capital. "They see a strong return potential amid a bout of IPOs hitting the market. Dedicated pre-IPO funds are yet to come out in a big way in India, but there is a clear momentum building in favour of this investment instrument."

Source: The Economic Times





Last updated by: anil.mascarenhas on Mon, 18 Sep 2017 11:40 AM