Thread by @vijayvenkatram

#PreIPO

The final round before an IPO is in essence signalling with a hope to get higher IPO valuations!

If the financing is marginal, it makes sense to ignore that!

(1/n)

If you are a small investor, investing in pre-IPO shares is not a great idea - Information asymmetry is almost highest at this point!

(2/n)

Between 2009 - 2011, starting with a Newspaper company and till Coal India participated in 11 IPOs. Was an anchor investor in 2 of them!

And in that period 12 IPOs had Day 1 pop (and still up after 30 days). The only one that I missed was 🍕

(3/n)

No broker reports / estimates are allowed, the evaluation process is left to the investor. For me it started with past and ended with it. Ignore future. If I have to consider future, I have 3000 other names (and since I was looking at other markets - add a few 1000's more)

(4/n)

What really came handy was a valuation approach based on the recent history that CCI (predecessor to SEBI) used in the 1990's - never failed me and had a decent Margin of Safety.

(5/n)

And yes - stayed away from IPOs in sectors that was much fancied at the time (#Power). So yeah - If I was managing money now, more likely ignore most of the Consumer Tech platforms!

(6/n)

My evaluation starts around couple of quarters before IPO, when the management does random roadshows (its not really random) and ends at the launch mega luncheon! (I was based at Hong Kong) and would have met the management atleast twice in this 5-6 month period

(7/n)

Can I replicate this now - big NO. Access to management is a very critical process in IPO investing (or trading)! If I cannot meet them, talk to them and understand them - no point in investing in them!

(8/n)

It always intrigues me as to how a small retail investor thinks IPOs are a good way to invest. While the return asymmetry works in favor (but that is true with Equity in general), information asymmetry works against retail investors! Not to mention the mortality rates.

(9/n)

So what is this thing about mortality rates - As a retail investor in 1993-94 (I was in my teens), I had invested in around 6-7 IPOs. 1 company remains listed.

No idea where the rest are! Buyer beware!

(10/n)

But my wife has done better. Her only IPO was investing in her employer in August 2004 and still holds (exited 50% last month) and yes, we do wish she had invested more!

(11/n)

And I really liked the lunch. Even if our fund was an anchor investor, I signed up for the lunch. Helped me with 2 things. (a) get a sense on the risks that others are considering and (b) post issue demand - there is information in the quality of the attendees!

(12/n) - End