While listed shares dominate the investment landscape, a lesser-known avenue offers unique opportunities for investors-Unlisted Shares. Unlisted shares are those of privately held companies that are not available on any stock exchange.
Unlisted shares are not traded on stock exchanges, making them less accessible to investors. Often unlisted shares are owned by founders, employees, venture capitalists, or private equity investors.
Unlisted shares have lower liquidity compared to listed shares. The absence of an organised market for buying and selling unlisted shares can make it challenging to exit investments quickly.
There are two common ways of investing in unlisted companies.
Companies may offer shares to private individuals or institutions through private placements. Investors can participate in these offerings based on eligibility criteria and investment terms set by the issuing company.
Specialised platforms, brokers, and marketplaces facilitate buying and selling unlisted shares. These platforms connect buyers and sellers and provide a regulated framework for transactions.
Obtaining information on unlisted shares can be more challenging compared to listed shares. However, investors can explore the following sources:
Companies issuing unlisted shares may provide information through private placement documents, investor presentations, and annual reports, although these may not be as extensive or publicly available as those of listed companies.
The most reliable place to get the data on an unlisted company would be the Ministry of Corporate Affairs website, as all companies have to submit their annual report and financial statement. One can quickly go there and check the information.
Some research firms specialise in analysing and providing insights on unlisted companies. Their reports can offer valuable information and analysis to investors.
Valuing unlisted shares involves a combination of qualitative and quantitative factors. Some methods commonly used for valuation include:
Assessing the company's earnings potential and applying a suitable multiplier based on industry benchmarks or comparable listed companies.
Determining the net value of the company's assets after deducting liabilities.
Estimating the future cash flows generated by the company and discounting them to present value.
Valuation differences between unlisted and listed shares can be substantial. Unlisted shares tend to trade at a discount to their listed counterparts due to limited liquidity, restricted access, and more significant risks associated with unlisted companies.
Meanwhile, not everything is great, and there are also challenges associated with investing in unlisted shares, including:
Unlisted shares can be illiquid, making it difficult to exit investments when desired.
Unlike listed companies, information on unlisted companies may be limited, making thorough due diligence crucial and challenging.
Investing in unlisted shares is suitable for specific types of investors, including:
Individuals with substantial financial resources and a higher risk appetite may consider unlisted shares as part of their investment strategy.
Experienced investors who can conduct thorough research and due diligence can capitalise on opportunities in unlisted shares.
These funds specialise in investing in unlisted companies and are well-positioned to assess their growth potential and manage associated risks.