Companies are staying private for longer, so more of their growth now happens before public investors can reach it. Pre-IPO investing is one way for clients to participate in that phase, and one that IFAs are increasingly asked about.
The potential upside can be substantial, and so can the risks. This guide explains how pre-IPO investments work, how they are structured and what advisers should check before bringing one to a client.
What Is Pre-IPO Investing?
Pre-IPO investing means buying shares in a private company that is expected to list in future. Clients typically buy in during a funding round shortly before the IPO, or acquire existing shares from early investors and employees.
The aim is to enter below the eventual listing valuation and benefit from any uplift at listing and from growth afterwards.
Why Clients Ask About It
- Potential valuation uplift if the company lists above the pre-IPO round price
- Established businesses with revenue, customers and a track record, rather than very early-stage start-ups
- A stated exit route, although a listing is never guaranteed
- Diversification through exposure to private companies not available on public markets
The Risks to Put in Front of Clients
Pre-IPO investments are high risk and generally only suitable for experienced clients who can afford to lose what they invest.
- The IPO may not happen. Market conditions, regulation or company performance can delay or cancel a listing indefinitely.
- The listing price may disappoint. A company can list below the pre-IPO round valuation, producing an immediate loss.
- Illiquidity. Until a listing or other exit there is usually no way to sell.
- Lock-up periods. Even after listing, pre-IPO holders are often restricted from selling, commonly for six to twelve months.
- Dilution. Further funding rounds can reduce the client’s percentage holding.
- Limited information. Private companies disclose far less than listed ones, making independent analysis harder.
Structures: What Is the Client Actually Buying?
Pre-IPO shares may be held directly or through a nominee or special purpose vehicle (SPV) that pools investor capital. Each route changes the client’s rights, costs and administration, so establish:
- Whether the client holds shares directly or an interest in a vehicle that holds them
- Which share class is offered and what rights it carries
- What fees apply, including any carried interest or performance fees
- What happens to the investment if the IPO is delayed or abandoned
Adviser Due Diligence Questions
- What evidence is there that the company is genuinely preparing for a listing, and on what timetable?
- How was the current valuation set, and how does it compare with listed peers?
- Is the company profitable or cash generative, and how long does current funding last?
- Who else is investing in the round, and on what terms?
- What are the post-listing lock-up arrangements?
- How large would the position be within the client’s portfolio, and could they afford to lose it?
Suitability and Sizing
Pre-IPO exposure is usually a small, high-conviction allocation. Spreading across several companies and accepting that some will not reach a successful exit is a realistic way to approach it. The client’s capacity for loss, liquidity needs and time horizon should be documented on file, alongside the investor category under which the opportunity is promoted, typically certified high net worth or self-certified sophisticated.
Conclusion
Pre-IPO investing gives clients access to companies at a stage of growth that public market investors often miss, but timing, valuation and liquidity are all uncertain. Rigorous due diligence and sensible position sizing are what make it defensible.
IFAs and wealth managers can see the opportunities we work with on our IPO page, or get in touch to discuss what your clients need.
Professional audience only: This content is intended for IFAs, wealth managers and other professional intermediaries. Target Wealth Group is a B2B business and we do not deal with retail investors.
Risk warning: This article is for information only and does not constitute financial advice or an offer to invest. Many alternative investments are high risk and illiquid, are not covered by the Financial Services Compensation Scheme (FSCS), and you could lose some or all of the money you invest. Past performance is not a reliable indicator of future results. Please read our full risk warning and seek independent financial advice if you are unsure.
