Conflict of Interest in Investment Banking
February 12, 2025
We have studied the various discounted cash flow valuation models in this module. These different models need to be applied in different situations. We have studied these situations as well. However, regardless of which model is being applied, one thing remains constant. In the end, the growth rate of the company plateaus down at a […]
Step-up bonds are special types of fixed income instruments. They help investors partially offset the risks of rising interest rates. This is because when investors invest in a bond, they typically lock in an interest rate. If the interest rate rises beyond that number, then the investors are at a loss because their money has […]
It is important for investors investing in fixed-income securities to be aware of restrictive covenants. This is because restrictive covenants can have a huge negative impact on the valuation as well as the liquidity of the debt. Bond indentures are detailed legal documents that can have many covenants which prove to be restrictive. However, there […]
An organization in order to raise money divides its entire capital into small units of equal value. Each unit is called a share. A share is nothing but an indivisible unit of a company’s capital to be sold among individuals to increase profit of the organization. Shareholder An individual owning one or more than one […]
Financial models are used by corporations almost every day. These models help while making several key strategic decisions. For instance, if a company plans to enter a new country or even take over another company, it is likely that it will create a financial model first. This model is a way of generating “What-If” information […]
An initial public offer (IPO) is a method of selling securities wherein the entire lot of securities is offered for sale to the general public. An IPO is often used by companies when they want to sell their securities to smaller investment organizations and even retail investors.
In the past few years, IPOs have seen a lot of speculative activity. It is not uncommon for retail investors to just buy shares in an IPO even though they have no intention of keeping these shares in the long run. This leads to a pump and dump effect on the IPO prices.
In order to mitigate this, investment bankers often help their clients undertake a pre-IPO placement. In this article, we will understand what a pre IPO placement is and how it affects the success of an IPO.
Pre-IPO placements, as the name suggests, are private placements that happen just before an IPO is about to be launched. During these placements, investment bankers approach large institutional investors with the stock of their client. In order to induce them to buy the stock, pre-IPO placements happen at a price that is lower than that of the IPO. These transactions often have a lock-in period, and the buying investor is not allowed to sell their shares on the open market for a period of time after the IPO has taken place. In most cases, this lock-in period is for one year.
Pre IPO placement methods are widely used by investors. This is because they offer many distinct advantages. Some of them have been listed below:
The above-mentioned advantages make pre-IPO placement a tempting option. However, there are several disadvantages of pre-IPO placements as well. They have been listed below:
The bottom line is that pre-IPO is a strategic tool that can be used effectively to manage the IPO process. However, the success of the pre-IPO strategy also depends upon the strength of the network of an investment banker. A weak investment banker cannot successfully pull off a pre-IPO placement.
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