What are the options for investors in delayed or deferred IPO environment?

Investors in unlisted shares space get a double whammy one from deferment of an IPO event and the other on account of a drop in valuation vs their listed peers in the relevant market. Moreover, the sentiment in the listed space also impacts the appetite of investors in the unlisted space. On top of it, the world war-like situation pushes negative sentiment to the market and which again delays the entire process of secondary placement. Investors in this typical situation always look for alternative options to IPOs for doing their secondary placement across markets. 

In most developed nations like Singapore and the United States of America where there is regulatory clarity and there are well-accepted secondary platforms in form of Alternate Trading Systems (ATS) akin to Private Market exchanges which operate and provide alternatives to investors both retail and institutional providing exit to investors instantly though there could be a cost associated which is generally higher than the cost for liquidating secondary through IPOs.

In developing markets like India where regulation is yet to evolve and the ecosystem is still at a nascent stage and with a number of startup unicorns exceeding more than 100 and hitting the capital market for fundraising, the market for secondary placement is increasing and need for providing liquidity to these investors base of start-up and pre-IPO companies is growing.

With the focus of the government of India on promoting the ecosystem from start-up, there will be a dire need to have a secondary liquidity platform helping stakeholders in these companies in buying and selling the illiquid inventories of unlisted shares (including ESOP), Units of AIFs, Units of Bonds and Fractional Units of commercial real estate. 

In India, investors could consider the following options for monetization of their investment in illiquid assets:

Buyback by the Company: In the case of profitable companies there could be options available to the investor for the buy back of its shares by the company. Buyback of shares is allowed up to 25% of the paid-up capita of the Company basis the last audited financials of the company.

Liquidity Program: Many start-up companies have come up with liquidity programs for their employees in the recent past to give full or partial exit to ESOPs held by past or existing employees subject to a certain amount

Marketplace Secondary placement: Investors can look at secondary placement through various platforms which have come up in recent times providing the option to the investor to list their stocks or ESOP and monetize the same through a liquidity window available through various pools of investors

VC debt funds: There are VC debt funds which are providing liquidity by way of short-term or long-term debt to ESOP holders of well-established companies and pre-IPO companies. However, this window has its own limitation and risk of price erosion in the private markets or public markets post listing

Though these are not exhaustive options and with the evolving of the ecosystem, there might be other options as well which could create monetization opportunities for investors, the most viable option appears to be a platform where there is transparency, safety and security of funds. 

Author: Manish Khanna, Co-Founder, Unlisted Assets