Pre-IPO And Secondary Market Trading
In the recent times, the pre-IPO market has emerged as an attractive alternative class for investors as they allow them to reap out the maximum benefits before the company goes public. While the pre-IPO market is considered to be a good opportunity for providing early access to huge potential gains, it may have some liquidity constraint. However, the pre-IPO secondary market allows the founders, early employees, and investors to receive liquidity much sooner in a company’s life cycle. The secondary market balances the need for liquidity and allows founders to stay motivated and focussed on building the company, while staying private for longer durations.
Secondaries trading platform like Torre Capital are committed to democratizing the Pre-IPO market, by making it secure and accessible to all. With a large number of companies achieving the unicorn status and having a great IPO exit, the pre-IPO space is booming more than ever. We shall look upon the various factors that have motivated the companies to stay private for longer and delayed their exit.
Pre-IPO Secondaries Volume Growth
Secondary market trading are stock transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes a merger, acquisition, or initial public offering. While the secondaries market was impacted in the early 2020, due to the pandemic, it has rebounded and witnessed continued growth since then. With over $50 Bn secondary deals completed in the first half of 2021, the transaction is projected to reach $100 Bn by the end of the year. It is estimated that over the next five years, the annual secondary volume could reach $250 Bn as limited partners manage their portfolios more actively.
The high amounts of funding rounds in the recent time period, along with optimistic valuations in the future, will continue to give a positive indication about the growth in secondaries activity.
Why are more companies opting to remain private?
Companies that go public gain an instant infusion of money by selling all or part of their firm in a public offering. While this may appeal to certain businesses, others recognise that public ownership has a cost. They avoid having to report to a big group of shareholders and can keep their company strategies and finances confidential by opting to remain private.
It can be seen that from the late 1990s to 2016, the number of publicly traded firms decreased by 52%. Despite this steep decrease, the entrepreneurial spirit has never been greater everywhere on the planet. The United States is ranked first in the world in the Global Entrepreneurship Index.
People are eager to establish their businesses. They just don’t want to share them with the rest of the world. The additional restrictions needed of publicly listed firms are one of the reasons companies don’t want to cope with the inconveniences of becoming public. The Securities and Exchange Commission is enacting increasingly harsh restrictions, which most firms would want to avoid.
This is especially true in situations when a large number of employees are also stockholders. Employees are free to focus on their tasks rather than the statistics since they don’t have to worry about what the stock is doing and what that could entail for their money.
Another reason a business could prefer to remain private is to have more control over its operations. A firm can remain in the hands of a few select people or families by remaining private. In addition, private firms are not subject to the whims of stockholders.
Private equity firms alone spent $130.9 Bn in biotech and tech start-ups in 2018. IPOs, on the other hand, took in $50.3 Bn. It should come as no surprise that, with so much money at risk and considerably fewer headaches, more private firms are opting for private equity.
There are several motivating factors for a company to go public. However, such access comes at a hefty cost in the form of SEC and shareholder scrutiny. As a result, many private firms opt to remain private and seek funding from other sources. Traditional lending institutions offer secured loans and shares that may be used as personal money or sold to employees to raise funds. This implies that while investing in private firms is feasible, it generally necessitates intimate links to the company.
How Has The Decision Benefited Tech Companies
The decision about whether to go public or stay private varies from company to company. Having a successful IPO may be important for a company, however it comes with several hassles, in terms of regulation level and the time involved. The dynamic of software firms within the IPO space is such that they do not wish to take the hassle and risk involved in secondary market trading or pre-IPO placements. With IPOs definitely a lot of risk is involved in not being able to match up to the investment that has been made and generating enough profits. Going public does help raise capital but it is an expensive endeavour for the company itself.
Software firms are approaching private equity firms instead for capital as that opportunity comes with less risk involved and fewer drawbacks. This is due to the sheer amount of capital in private equity that gives a strong standing to the firm. Technology corporations have raised successful funds in the private rounds that have made them achieve the decacorn status while staying private. On the other hand, entering into a public market through IPO may also possess the risk of downside. Astudy by Battery Ventures estimated that over 40% of the unicorns that have gone public since 2011 have underperformed their final private-market valuations. From company’s average age of 4 years to go public, in 1999, to the 2014 average age of 11 years, we see a change in preference of the companies in the decision to stay private.
Late Stage Investors Enjoy Higher Returns
As mentioned before the growing scale of fundraise rounds lead to inflated valuation of startups. While high valuation may be good for the company, overvaluation may pose a risk of downside. As a result investors, especially late stage investors avoid counting on IPOs to make money. On the contrary, early stage investors remain unaffected with the downside risk as they invest early enough to gain positive returns.
As early employees and investors seek liquidity, the private market activity steps up in such a scenario. A delayed IPO would give the late stage investors more time to reap the benefits of the growing valuation and greater returns.