Pre-IPO investing

Investing in private companies approaching the public markets: How it works and what to consider

What is pre-IPO investing?

Pre-IPO investing allows investors to acquire equity in private companies that are expected to pursue a public listing. These companies are typically more mature than early-stage startups, often with established revenue, institutional backing and a trajectory toward an initial public offering or direct listing.

As private companies have stayed private longer over the past two decades, a greater share of company growth now occurs before shares become available on public exchanges. Pre-IPO investing offers a way to participate in that growth, though it comes with its own set of risks, structural considerations and liquidity constraints.

Pre-IPO investing involves purchasing equity in a private company during the later stages of its development, typically after several rounds of institutional funding and before the company completes a public offering. Investors may access these opportunities through late-stage venture funds, secondary market transactions or structured investment vehicles.

Within private markets, pre-IPO investing sits between traditional venture capital and public equity. The companies involved are generally further along in their development than typical VC-stage businesses, but their shares are not yet freely tradable on a public exchange.

Key terms to know

IPO (Initial Public Offering)

The process by which a private company offers shares to the public for the first time on a stock exchange

Direct listing

A path to public markets in which a company lists existing shares on a stock exchange without issuing new shares or raising additional capital

Secondary transaction

The purchase of existing shares from a current shareholder, such as an employee or early investor, rather than directly from the company

Late-stage funding round

A financing round, typically Series C or later, in which a company raises capital at a mature stage of development, often in preparation for a public listing

Lock-up period

A contractual restriction preventing investors and insiders from selling shares for a defined period following a public offering, commonly 90 to 180 days after the IPO date

How value is created for pre-IPO investors

Pre-IPO investing is focused on capital appreciation, with the expectation that a company's valuation will increase as it transitions from private to public markets.

Value is typically created through:

Continued company growth

Revenue expansion, market share gains and product development that increase the company's valuation in the period before a public listing

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Public market repricing

When a company goes public, its shares are valued by a broader investor base, which may result in a valuation above the price paid in private markets

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Discount to expected IPO price

Pre-IPO investors may acquire shares at a discount to the anticipated public offering price, providing a potential margin of appreciation

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Liquidity creation

The transition to public markets provides a mechanism for investors to sell shares, converting a previously illiquid position into a tradable one

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The degree of appreciation depends on factors including the company's fundamentals, market conditions at the time of listing and the terms at which pre-IPO shares were acquired.

Structure and features of pre-IPO investments

Pre-IPO investments can be accessed through several channels, each with distinct characteristics.

Investment structures may include:

Late-stage venture

Late-stage venture capital funds that invest in companies approaching a public listing

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Secondary market

Secondary market platforms that facilitate the purchase of shares from existing shareholders

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SPVs

SPVs (special purpose vehicles) formed to aggregate investor capital for a specific pre-IPO opportunity

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Direct share

Direct share purchases from employees or early investors, subject to company transfer restrictions

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Core features:

Entry valuation

Pre-IPO investments are priced based on the company's most recent funding round or negotiated secondary market pricing, which may or may not reflect the eventual public valuation

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Transfer restrictions

Private company shares are typically subject to restrictions on resale, including company right of first refusal and board approval requirements

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Information availability

While more mature than early-stage startups, pre-IPO companies are not subject to public disclosure requirements, and financial information may be limited

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Hold period

Capital is generally committed until the company completes a public listing and any applicable lock-up period expires

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Fees

May include management fees, carried interest or transaction fees depending on the investment structure

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Risk considerations

Pre-IPO investing involves a set of risks that are distinct from both early-stage venture capital and public equity investing.

IPO timing uncertainty

There is no guarantee that a company will go public on a specific timeline, or at all. Market conditions, regulatory requirements or company-specific factors may delay or prevent a listing

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Valuation risk

The price paid for pre-IPO shares may exceed the eventual public offering price, particularly if market conditions shift or the company's growth trajectory changes before listing

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Lock-up restrictions

Even after an IPO, investors may be unable to sell shares during the lock-up period, during which the stock price can fluctuate significantly

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Time horizon and liquidity

Pre-IPO investments generally have a shorter expected hold period than early-stage venture capital, but the timeline remains uncertain.

Typical hold period

Often 1 to 5 years, depending on how close the company is to a public listing at the time of investment

Liquidity profile

Illiquid until the company completes a public offering and any lock-up period expires

Secondary markets

Some platforms facilitate secondary trading of pre-IPO shares, but availability, pricing and transfer approval are not guaranteed

Post-IPO liquidity

After the lock-up period ends, shares can typically be sold on public exchanges, though the price at that point may differ from the IPO price

Investors should be prepared to commit capital for multi-year periods, with cash
flows that may be gradual rather than lump-sum.

Common pre-IPO investing strategies

Late-stage fund investing

Participating through venture capital or growth equity funds that specialize in companies nearing a public listing.

Provides diversification across multiple pre-IPO companies within a single fund

Relies on the fund manager's expertise in evaluating late-stage opportunities and timing

May include exposure to companies across sectors and geographies

Secondary share purchases

Acquiring existing shares from employees, founders or early investors through secondary market transactions.

Offers access to specific companies an investor wants exposure to

Pricing is negotiated and may reflect a discount or premium relative to the most recent funding round

Subject to company approval and transfer restrictions

SPV or syndicate participation

Investing through a special purpose vehicle organized around a single pre-IPO opportunity.

Allows investors to access deals they may not be able to participate in individually

Terms, fees and minimum commitments are defined by the SPV organizer

Concentrates exposure in a single company, which increases both potential upside and risk

Diversified pre-IPO portfolio

Building a portfolio of pre-IPO positions across multiple companies, sectors or vintage years.

Spreads risk across several companies at different stages of the path to public listing

Increases the likelihood that at least some positions will benefit from favorable IPO outcomes

Requires a larger total capital commitment and ongoing access to deal flow

How pre-IPO investing may fit into a broader portfolio

Pre-IPO investing can serve as a complement to both traditional venture capital and public equity allocations within a diversified portfolio. Allocations should be evaluated in the context of an investor's overall portfolio strategy, liquidity needs and tolerance for uncertainty around timing.

Growth orientation

Focused on capital appreciation through the private-to-public transition

Diversification

Provides access to companies in a stage of development that is not available through public markets

Risk profile

Generally lower risk than early-stage venture capital due to the maturity of the companies involved, but higher risk than public equities due to illiquidity and limited disclosure

Correlation

Returns are influenced by both company-specific performance and public market conditions at the time of listing

Time horizon alignment

May suit investors with medium- to long-term horizons who can tolerate a period of illiquidity

Tax-advantaged investing

Pre-IPO investments may be accessed through structures such as a self-directed IRA (SDIRA), which may allow investors to allocate tax-advantaged retirement capital toward late-stage private market opportunities

Questions to consider

Before investing in a pre-IPO opportunity, investors may find it helpful to ask:

What is the company's expected timeline to a public listing, and what factors could affect that timeline?

What information is available about the company's financial performance and growth trajectory?

At what valuation are shares being offered, and how does that compare to the most recent funding round?

How does this investment fit within my broader portfolio allocation and liquidity needs?

What transfer restrictions or lock-up provisions apply to this investment?

What fees and expenses are associated with the investment structure?

Pre-IPO investing offers exposure to mature private companies approaching the public markets and the potential to participate in the value created during that transition. It requires careful consideration of valuation, timing risk and liquidity constraints, along with a clear understanding of how the investment fits within a broader portfolio strategy.

Curious how to use retirement assets to fund pre-IPO investing?

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