Pre-IPO Placement

A pre-IPO placement occurs when part of an initial public offering (IPO) is placed with private investors just before the IPO is scheduled to hit the market.

Private investors in a pre-IPO placement are typically large private equity or hedge funds that are willing to buy a large stake in the company. The size of the investment means the price paid for shares in a pre-IPO placement is usually less than the prospective IPO price.

[Important: Individual investors must wait until the company starts trading on the secondary market to purchase share.]

Another way to define a pre-IPO placement is the money raised by a company before it goes public. The amount per share is generally discounted from the expected IPO price. There is no real guarantee when the company will go public or the exact price per share will be when it does.

These placements occur when there is a high demand for an upcoming IPO. This is because the placement's price per share—and its risk—is contingent on the company eventually going public and its eventual trading volume. The risk arises when the post-IPO demand is lower than expected demand, which decreases the share price. As mentioned above, pre-IPO placements compensate for this risk by offering the discounted price.

But if demand causes post-IPO prices to increase, private equity, and hedge funds would be able to immediately sell the shares at a higher price. To prevent this, a lock-up period is generally attached to the placement. This period prevents these funds from selling the shares in the short-term, attracting more long-term investors.

Prior to going public in September 2014, Alibaba opened up a pre-IPO placement for large funds and wealthy private investors. As of June 2014, the company was thought to be valued at $150 billion, with demand building for its eventual IPO. Private investors were excited about the chance to invest in the company before it went public.

Ozi Amanat, an investor and portfolio manager, purchased a block of $35 million of pre-IPO shares. He allocated the shares among Asian families who had ties to the fund, with each gaining shares valued below $60 per share. When Alibaba went public, demand was even higher than expected, and those who received parts of the $35 million block of stock were rewarded with returns of at least 48%.

For Alibaba, this pre-IPO placement mitigated its risk. Even though share prices traded higher on public exchanges, the company ensured it received adequate funding before its IPO.