Savvy investors are often looking to invest in the next big thing, while aiming to maximize potential returns. Because of this, alternative investments, and in particular pre-IPO (Initial Public Offering) stock investing has gained traction amongst a growing number of accredited investors. On EquityZen’s platform alone, over 550,000 investors come to explore pre-IPO investment opportunities - and with regulatory changes, this market which used to be primarily available only for institutional investors, is more accessible than ever.
While alternative investments can be an exciting and important part of a diversified portfolio, investing in the private markets requires additional consideration, beyond what one might evaluate when investing in the public markets. If you work with a financial advisor, it’s important to evaluate these investment opportunities with your advisor in the context of your broader portfolio, goals, liquidity needs, and risk appetite. Here, we'll explore the essential topics to cover with your financial advisor to determine if allocating capital to alternatives via pre-IPO investing is right for you.
Key Considerations
Alignment with Financial Goals:
Before exploring any investment, it's important to have a clear understanding of your financial goals and if that particular investment aligns with these goals. Whether your goals include long-term wealth accumulation, retirement planning, or funding a specific milestone like buying a home, your financial advisor should know your financial goals. This is the foundation that they will use to tailor their advice to align with your unique financial situation and aspirations. Often, investors interested in pre-IPO investing are looking to achieve outsized returns that outperform public benchmarks over the long term. Conversely, investors with low risk and return goals are less likely to be a fit for pre-IPO investing.
Understanding Your Risk Tolerance:
Pre-IPO investments come with a higher level of risk compared to traditional investments. With their knowledge of your risk appetite, your financial advisor can determine if pre-IPO investing is right for you. Investing in private companies means buying a stake in their future. While there's a potential for significant returns if the company succeeds, there's also a risk of total loss if it fails. Pre-IPO companies also are required to disclose less information than publicly traded companies which can add additional risk. Investors must be comfortable with this risk in the context of their broader investment portfolio and your financial advisor can help determine if your risk appetite aligns.
Existing Portfolio Composition:
Like any investment, pre-IPO investments need to be considered in the context of your broader investment strategy. Most investors consider pre-IPO investments as a core part of their alternatives allocation, which some professional advisers suggest should account for 15-30% of your overall portfolio. As companies stay private longer than ever, pre-IPO investments may also be considered part of an overall growth equity allocation which may span both public and private company investments.
The Role of Diversification
Your financial advisor should be keenly focused on making sure your portfolio is diversified enough to weather market volatility, reducing the risk that any one position overly sways your portfolio performance for the positive or negative. Pre-IPO investments can include investments in single private companies or in diversified managed funds. Regardless of your portfolio composition and risk tolerance your advisor will likely suggest that you invest in several different pre-IPO companies to reduce your performance reliance on any single investment. They will likely look to pick private companies across sectors and stages to further diversify, while making sure that private companies as a whole make up a reasonable, but not too large, percentage of your overall portfolio1.
Assessing Liquidity Needs:
Pre-IPO investments are often long-term investments that investors should expect to hold for up to five to seven years. Even after an IPO, newly public companies typically have a lock-up period, during which investors may not be able to sell their shares. Discuss your liquidity needs with your financial advisor to ensure that pre-IPO investments won't hinder your ability to access funds when necessary. Pre-IPO investments should only be made with capital intended to be invested over the long-term, not capital you may need in the next few years. While more options for pre-IPO liquidity are becoming available like Express Deals, balancing long-term growth with short-term cash needs is essential. Make sure your financial adviser understands both your near term and long term goals to make sure illiquid investments like pre-IPO companies are right for you.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
Exploring Pre-IPO Opportunities:
If you and your advisor have determined that pre-IPO investments are a fit for your portfolio it’s now time to explore the available opportunities. Platforms like EquityZen work with many financial advisors to help them identify the right investments for their clients goals and needs. Advisers who are informed about the private markets can provide insights on companies potentially considering going public and the potential risks and rewards associated with such investments. It’s important to keep an open dialogue about what you’re looking for and how it aligns with your overall investment strategy.
Conducting Due Diligence:
Before making any investment decisions, your financial advisor can help you conduct the appropriate due diligence. They can assist in analyzing the structure of any particular pre-IPO offering along with the business fundamentals of any given company. Our guide to investing in pre-IPO secondaries can be a helpful resource for both you and your advisor. If you choose to invest in a diversified fund, your advisor can review marketing materials, fund terms, prior performance and conduct due diligence of the investment manager to help ensure you’re making a smart investment with a reputable firm.
Staying Informed About Market Conditions:
Like any investment, macroeconomic factors can significantly impact the success of pre-IPO investments. Your advisor can help you stay informed about market trends, economic indicators, and any factors that may influence the success of your investments and what your overall investment allocation should look like. While many advisors advise their clients to invest for the long term, tactical investment positioning may also be considered.
When considering alternative investments, and pre-IPO investments more specifically, having an open line of communication with your financial advisor can help set you up for success. Their unique knowledge of your financial goals, risk tolerance, and liquidity needs, amongst other considerations can help you determine if pre-IPO investments are right for you and the role they should play in your portfolio. At EquityZen, we encourage you to collaborate with your advisor to assess opportunities, conduct due diligence, and make informed decisions that align with your unique financial situation and goals. After all, a well-informed investor is better positioned to make strategic and successful investment choices.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
1. Diversification does not assure a profit or protect against market loss.
Disclaimer: Not all pre-IPO companies will go public or be acquired, and not all IPOs or acquisitions are or will become successful investments. There are inherent risks in pre-IPO investments, including the risk of loss of the entire investment, illiquidity, and fluctuations in value and returns. Investors must be able to afford the loss of their entire investment. Neither EquityZen Securities LLC nor any of its affiliates provides investment advice, and nothing contained herein shall be construed as investment advice nor as a recommendation to purchase, sell or hold any security.
