Understanding Pre-IPO Investing – How To Generate Returns And Avoid The Pitfalls

By David Willington | More Articles by David Willington

Pre-IPO investing has the potential to generate significant returns in a relatively short space of time, however, there are many issues to consider that may not be obvious to the regular investor.

In this paper, I explain the Bombora process and methodology to Pre-IPO Investing and why Bombora strongly believes that it can continue to deliver circa 30% per annum returns for our investors into the future.

The key attributes to successfully investing in Pre-IPO opportunities include:

Pick the right one!

Sounds obvious, but not that easy. I am all sure investors have had friends and family pitching their private investment opportunity and out of obligation feel compelled to invest. At Bombora we meet literally 100’s of private companies every year. However, we will only invest in 5-10 per annum and therefore, by definition, we are very selective. Some of examples of what we look for in a great pre-IPO investment are:

▪ Historical revenue growth rates of 15%+
▪ Strong gross margins (over 50% for standard businesses and over 80% for SaaS-based companies)
▪ A defensive barrier to entry (such as deep IP or patents)
▪ A business model that can easily be scaled globally
▪ Energetic, authentic and intelligent management teams
▪ Positive momentum on all core KPIs

Get hands-on

At Bombora we don’t tend to like putting investor’s hard-earned money into an investment and then hoping it all goes well (as they say “hope is not a strategy”). We seek to take active positions within the companies that we invest by taking board seats (normally the Chair role). We find the benefits of this approach are significant for both our investors and the companies that we invest in. Founders can benefit from our nine core team member’s experience (all of whom have worked for over 25 years’ in private equity, corporate finance or senior management) whilst Bombora can add value and guide towards the IPO. Once an investment is made Bombora will partner with management teams to build out the board, improve reporting, budgeting, and governance. Bombora will then use its deep capital market networks to drive the company through the listing process to ensure our investments list on the ASX within our 18-month unlisted time horizon

Find the deal before the market does

At Bombora we pride ourselves on identifying and sourcing Pre-IPO investments prior to the wider market discovering the opportunity. This enables us to strike a favorable exclusive deal terms which is critical to generating investment returns. Ourbroadteamof 9 senior executives with deep networks and who have all been sourcing and executing private transactions for over 25 years each.

Correct structuring

A key to successful pre-IPO investing is to structure the deal correctly: not just to capture the full upside but also to protect our fund’s investors if the investment does not go as planned. Through the intelligent use of products such as convertible notes, preference shares, performance rights, secured short term secured loans we have the ability to enhance returns if the investment goes very well but also to have our money returned with interest things do not turn out as expected. Through the use of intelligent structuring we have made many multiples of our money on an investment however when things have not gone to plan we have examples where we have had our capital returned with interest

Deep due diligence

Many traditional non-active Pre-IPO investment funds will invest on the back of a few meetings and a swift desktop analysis. As a high conviction fund that does very few transactions every year, we adopt a different and far more thorough due diligence process that can, at times, take many months to complete. Highlighting this approach was our recent hire of Australia’s leading private equity and venture capital due diligence expert, Bryan Zekulich who had for the last 15 years been Head of Private Equity Due Diligence for Oceania at EY

In summary, investing in Pre-IPO can be very lucrative (as our 30% per annum returns demonstrate) however it is not a place for the inexperienced investor. At Bombora we offer investors access to diversified range of Pre-IPO opportunities whilst investors can feel safe in the knowledge that they have the most experienced and hands-on team in Australia watching over and managing their exposure to this style of investment.

About David Willington

David Willington has been a corporate financier and investment banker for over 25 years and is a Co-Founder of Bombora Investment Management. David has spent all his career executing private transactions in the technology, media telecommunications industry. David has worked in some of the world’s most prestigious financial organisations such as Salomon Brothers / Citi, N M Rothschild and Sons, EY and most recently as a Senior Partner at Deloitte where he was Asia Pacific head of TMT and was a partner in the M&A practice in Sydney. He holds a Bachelor of Commerce, Master of Applied Finance is a Chartered Accountant and a Fellow of FINSIA.

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