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What Pre-IPO Investing Can Do For Your Portfolio During a Recession

What Pre-IPO Investing Can Do For Your Portfolio During a Recession

According to Google Trends, the popularity of the search term “recession” jumped from a 4/100 in January of 2022 to a 100/100 in June. We are currently in a bear market—which means it can be confusing where to put your money (when so many stocks are going down).

 

However, this is not our first bear market. In fact, it’s our 22nd. But there are ways to manage your existing investments, and even invest in new ones, in ways that have historically been shown to endure recessions.

 

Looking at alternative investments, including venture capital, real estate, and pre-IPOs can be a potentially effective strategy to maintain asset value and even see growth in the midst of a bear market.

 

Why alternative investments?

Alternative investments do not fall into conventional investment categories, such as bonds, stocks, cash, or cash equivalents. Not to be confused with defensive stocks, which are historically safer and provide more stabilized earnings throughout stock market downturns, alternative investments are often uncorrelated with the stock market. That means that they are not affected (or not as affected) by the market as stocks and bonds during periods of economic uncertainty or downturn.

 

These investments include a wide range of offerings, from real estate, private equity, hedge funds, and even art. For this article we’re going to look at one alternative asset in particular: pre-IPOs.

 

The truth about pre-IPO investing

Some investors may not be aware of pre-IPOs, what they are, or the value they hold. When a company goes public and opens its shares to purchase on exchanges like the New York Stock Exchange or Nasdaq, it is called an “initial public offering,” or IPO. A pre-IPO is a private sale of large shares in a company before that company has gone public.

 

Buyers often include major financial institutions such as hedge funds or private equity firms who can afford to buy significant stakes in a company before it has listed, and they receive shares at a discounted rate from the planned IPO price. The purpose behind pre-IPOs is essentially to raise funding and also defend against possible issues that arise should the IPO not perform as well as desired.

 

Traditionally, pre-IPO shares were restricted to these major organizations or other institutional or accredited private investors. But now, times have changed with the advent and growth of marketplaces and crowdfunding platforms. This has made it easier for standard investors to consider buying into startups and even hot private companies before they go public.

 

 

Pre-IPO benefits during a recession

So, why would investing in a company pre-IPO be worth your time, especially during a recession? Because they are more disconnected from the stock market than traditional investment options, much of their value comes from the merits of the company.

 

Suppose the company is perceived as a successful enterprise with a promising trajectory. In that case, it can continue to thrive while public companies (even successful, profitable ones) can suffer in valuation due to recessionary forces. While no company is completely protected from market forces, private companies are by design less impacted from market forces (both positive and negative) than public ones.

 

Take, for example, a hypothetical pre-IPO electric car company and a public electric car company dealing with a surge in gas prices. Fluctuating gas prices would most likely impact the pre-IPO company to some extent. For example, if gas prices increase dramatically, there may be more demand for electric vehicles, and they could sell more cars. Or, perhaps, the increasing gas prices lead the manufacturers of gasoline-powered cars to lower prices overall, and fewer pre-IPO electric cars are sold. But the value of the company isn’t inherently tied to the rise in gas prices.

 

On the other hand, a major swing in gas prices could significantly impact the public electric car company —as a public stock is inherently speculative (to some degree). Investors may flock to the public electric car stock in response to the increasing gas prices, raising the price. Alternatively, it may indicate inflation or a recession, which will cause most (if not all) stocks to decrease in a speculative selloff.

 

Because pre-IPOs are often less correlated, they are usually less impacted by market forces (positive or negative).