July 25, 2022

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

Written by: HUDSONPOINT Team

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.


Recession Investing

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).

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Pre-IPO risks

But while pre-IPOs are less connected to market forces, investing in them is still an investment and carries certain levels of risk with it. However, the potential returns that a pre-IPO can deliver might make it worth it to investors looking to invest during a bear market who may not be interested in the present volatility of stocks.


With a pre-IPO investment, there is no guarantee your money will do well. In fact, depending on how the company does, you could stand to lose part or all of your investment, whether the IPO fails, demand for stock is minimal, or the company just performs terribly. You are also taking a gamble on when, and if, the company will go public. Pre-IPO investing is based on expectations of an eventual IPO in the near future. However, it is just that: an expectation, or an assumption.


There is no guarantee that a company with pre-IPO investing will go public, and even those that plan to may be forced to halt, postpone or even cancel their planned public offerings for various reasons.


Other potential issues include the presence of scam artists, or people and companies promoting fraudulent pre-IPO offerings that often look legitimate, seem professional, and do their best to lure in unsuspecting investors.


With all that in mind, are the potential upsides to pre-IPO investing really worth all the risk? That’s for you to determine.



Why alternative investments?

For starters, pre-IPOs are a way to diversify your existing portfolio holdings, as they fall under a private investing category known as private placement investments. This can be beneficial to investors with a significant number of existing public entities looking for more private investment opportunities, as a diversified portfolio is usually more protected.


Pre-IPOs are a long-term investment, and can potentially provide substantial returns if . By investing in pre-IPOs, you are not only getting stock at possibly discounted rates, which may increase your eventual returns especially if bought during a recession, but you are also investing in the future of an entire company. Assuming that company does well, you stand to benefit alongside the company.



Preparing for recessionary forces

When a recession looms, it can be tempting to succumb to fear and either sell off your investments or invest poorly in an attempt to take advantage of a bear market. It’s important to think wisely about your investments, consider your options, and look for strategies that stand to help your existing finances survive the economic downturns and grow your long-term wealth. Pre-IPOs may be a great way to diversify your portfolio, so long as you understand the risks before purchasing.


Interested in learning more about pre-IPO investing and how you can add pre-IPO shares to your portfolio? Schedule a Call and our team of dedicated investment executives will help you analyze your existing assets, determine whether pre-IPO investing is the best choice for you, and help you move forward with the ideal investment strategies for your portfolio.













The opinions expressed are those of HUDSONPOINT capital and not those of B. Riley Financial..
Please note that any investment involves risk including loss of principal. Some risks of investing directly or indirectly in real estate include declining real estate values, changing economic conditions and increasing interest rates.
This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.
Securities offered through B. Riley Wealth Management Member FINRA/SIPC.




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