Besides IPO-bound firms, start-ups and stable companies, wealthy investors can also look at delisted companies
Wealthy investors in India are increasingly looking at alternative investments to generate impressive returns, sometimes far higher than regular equity market returns. With equity indices continuing their stellar run, the initial public offering (IPO) space is buzzing with activity for the last one year. A total of 37 IPOs have hit the market so far in 2017 with record fundraising of Rs 56,870 crore. This is far higher than the previous record of Rs 37,535 crore raised in 2010.
This buoyancy in the listed space has perked up interest in private equity, popularly known as unlisted equity. Unlisted equity is the kind of security which is not publicly traded but may be available in the over-the-counter (OTC) market. One can buy these stocks through internal contacts in a company or from specific dealers who deal with such securities. Also, one can even invest in such companies by purchasing shares from employees who own stock options and would like to exit.
The major reason behind investors’ growing interest in unlisted stocks can be attributed to the intention of getting a larger pie of shareholding compared to the lower one may get in case of large oversubscription, when the company goes public. Many investors also believe it will be a lot better to buy a good company before the IPO due to probable low valuations.
Apart from these factors, India is fast emerging as a land of innovators with a large number of start-ups coming in the technology, e-commerce, and financial services space among others. Usually, venture capital (VC) funds intend to exit after a start-up attains certain stage of growth, which provides high networth individuals (HNIs) an opportunity to invest in the next growth phase and unlock value as and when market condition allows doing so.
Stable companies with sound cash flows and good growth model are considered to be the gems in the unlisted equity space. Despite not being listed, they raise money from private investors through avenues like convertible debenture issuances or rights issues. These companies with sound capital structures may not hit the primary market in the near-term but have high probability of going public in the future. Investors can consider these categories of companies in the unlisted equity space for garnering higher than normal return on investments.
Besides IPO-bound firms, start-ups and stable companies, wealthy investors can also look at delisted companies for possible investment. Companies usually delist when they want to restructure the entity or expand their areas of operations into new fields. Also, when a company is acquired by another firm or the promoters want to raise their stake, company may choose the path of delisting. These delisted companies have a probability of again entering into the market. Therefore, investors can look at investing in such companies for better returns. This can be a highly risky bet as the company may not go for a listing again, at all. Investors should also avoid companies which were forced to delist by the regulator due to non-compliance with various regulations.
Some of the risk factors include: Market is replete with instances where unlisted stocks have generated huge returns for investors. Nevertheless, it is fraught with multiple risks, which an investor should weigh in before committing any investment. Firstly, unlisted stocks lack any formal market place for price discovery. So, an investor is dependant on intermediaries & limited market information for getting the valuation right. In the absence of prescribed valuation method, pricing will be tricky to arrive at.
Without a mechanism for oversight, transactions are also fraught with the risk of fraud, as in some instances, unscrupulous intermediaries have been known to collect money from investors and then not deliver shares.
Further, liquidity is another concern in this type of investment as delay in unlocking value in the company will force the investor to stay invested in the entity without any return. So, the investor should calculate the opportunity cost before putting in money in the unlisted space. Therefore, a fair comparison with a peer group firm with regard to various financial and operational parameters is a must before arriving at a value for investment.
Given the risks attached to such investments, risk averse investors may be better off waiting for IPOs to put their money into such companies than to invest in unlisted equities.
Despite risks attached to such investment, focus on unlisted equity is all set to rise in coming days. As many experts believe that Indian economy has the potential of tripling its size in next decade, more companies will surely go for listing in the primary market, unlocking potential valuations. This, in turn, will generate greater interest in the unlisted equity space.
GAUGE SHARPER
- Besides IPO-bound firms, start-ups and stable companies, wealthy investors can also look at delisted companies
- The investor should calculate the opportunity cost before putting in money in the unlisted stocks
The writer is CEO, Karvy Private Wealth
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