Risk & Risk Mitigation
While investments in Unlisted/Pre IPO shares have the potential of giving high returns, they are also accompanied by higher risk due to a variety of reasons like lower regulatory requirements, lack of liquidity, availability of information, higher mortality etc. Investors need to exercise caution while investing in Unlisted/Pre IPO companies.
Generally, they should have a minimum time horizon of 4 years and should not allocate more than 30% of their portfolio to Unlisted/Pre IPO shares. The key to the art of investing in unlisted shares is to identify companies with great business fundamentals and great corporate governance - one is useless without the other. Investors can use various proxies like the promoters’ track record, voluntary public disclosures etc to assess the corporate governance. A lot of research has to go into understanding the business fundamentals. Investors can also choose to invest only in companies with relatively larger market capitalisation (Say above ₹ 2000 Cr) and thereby mitigate the mortality risk while retaining the returns expectation.
All in all, if approached strategically, investments in unlisted equities can prove to be extremely healthy for an investor’s portfolio!
This article has been contributed by Altaf Siddiqui, MD & CEO, Enrich Advisors.
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