What is an IPO exit route?

An initial public offering (IPO) provides companies and existing investors with a route to raise capital and create liquidity. For founders, early investors, and private equity investors, an IPO can also provide an opportunity to reduce or completely exit their investment.

This article discusses IPO exit strategies, their types, common IPO terms, and the lock-in period.

What is an IPO Exit Route?

An IPO exit route is a way through which existing shareholders, such as founders, early investors, or private equity investors, can sell all or part of their holdings. This exit strategy is possible when a private company goes public through an IPO.

An IPO can include a fresh issue, an offer for sale, or both. In a fresh issue, the company issues new shares and receives the proceeds. In an offer for sale (OFS), existing investors sell their holdings to public investors.

For existing investors, an OFS can provide liquidity while allowing them to realise part of their investment. However, the investors may need to comply with applicable regulatory and contractual requirements.

Also Read: Fresh Issue Vs Offer-for-Sale

Type of IPO Exit Strategies

Here are the four main types of IPO exit strategies:

• Complete Exit:

In this scenario, private investors sell all their shareholdings after the IPO to liquidate their investment. This locks in the profits or losses but means forfeiting the potential for future gains.

• Partial Exit:

In a partial exit, investors sell a portion of their holdings while retaining the remaining shares for potential future appreciation in value.

• Strategic Sale:

In this scenario, an investor sells their stake to another strategic or financial investor, before or after the company goes public.

• Buyback:

A company repurchases its shares from eligible shareholders, providing investors with a separate route to realise their investment.

Common IPO Terms

Here are a few common IPO terms:

• Primary market:

The primary market is where newly issued securities are offered to investors, with proceeds from fresh shares generally going to the company.

• Secondary market:

The secondary market is where investors trade already-issued shares with one another after they are listed on a stock exchange.

• Float:

Float refers to shares available for public trading, excluding shares that remain restricted or closely held under applicable conditions.

• Market price and market valuation:

Market price represents the current trading price, while market valuation reflects the company’s value based on its outstanding shares and market price.

• Issue price:

Issue price is the price at which shares are offered to investors during the IPO, generally within the disclosed price band.

• Allotment:

Allotment is the process by which IPO shares are assigned to investors under the applicable allocation rules.

Understanding Lock-in Period in an IPO

A lock-in period in an IPO is a specified period during which certain shareholders are restricted from selling their shares.

• In the case of anchor investors, the lock-in period can be 90 days for 50% of the allotted shares. The remaining 50% is locked in for 30 days after the allotment.

• In the case of promoters, the lock-in period is 18 months for allotment of up to 20% of post-paid-up capital and 6 months for the rest of the investment.

• In case of non-promoters, the lock-in period is 6 months.

What Happens After Lock-in Period Ends?

After the lock-in period, private investors usually sell shares they’ve decided to divest in batches, that is, in parts rather than in one go. This approach helps minimise the problem of oversupply and market panic, which can bring down the share price. Often, private investors sell only a part of their holdings, especially if they think the company's prospects are good.

Such a sale often triggers a fall in the share price, as seen with IPOs after the lock-in period expires. The share price may eventually recover following strong company performance or settle at a new normal.

FAQs

• What is an IPO exit strategy?

An IPO exit strategy is a way for private investors to cash out their investments by selling their shares to the general public.

• What is the lock-in period in an IPO?

An IPO lock-in period is a timeframe in which major pre-existing shareholders and insiders are legally restricted from selling their shares to ensure price stability after listing.

• What is the advantage of an IPO exit?

An IPO exit helps investors realise their profits and reduce risk. It also provides market liquidity and allows the general public to participate in companies' growth.