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The financial world is witnessing a paradigm shift with the rise of unlisted markets. Earlier once overshadowed by their listed counterparts, they are now gaining prominence, offering a plethora of opportunities and challenges for investors, entrepreneurs, and market participants. As the landscape evolves, it is imperative to understand the dynamics of unlisted markets and navigate through the complexities they present.
Unlisted markets refer to the buying and selling of shares in companies that are not listed on public stock exchanges. These companies can range from startups to well-established private entities that choose to remain private for various reasons, such as maintaining control, avoiding the regulatory burdens of public markets, or because they are still in early growth stages.
Access
Accessing unlisted markets requires a different approach compared to investing in publicly traded companies. Here are several ways investors can enter unlisted markets:
Angel investing: Angel investors provide early-stage capital to startups in exchange for equity. This often involves direct negotiation with the company’s founders. Angel investors not only provide funding but also mentorship and industry connections. Dedicated investment platforms provide investors with angel investing opportunities.
Venture capital: Venture capital firms pool funds from multiple investors to invest in high-potential startups. These firms typically focus on specific sectors and stages of company development, providing both capital and strategic guidance.
Private equity: Private equity involves investing in established private companies. Private equity firms often buy significant stakes or entire companies, aiming to improve their performance and eventually sell them at a profit.
Direct investments: Some investors choose to invest directly in private companies through their own networks. This often involves substantial due diligence and a thorough understanding of the business and its potential.
Opportunities
Unlisted markets provide a fertile ground for investors seeking high returns and diversification. They offer access to companies at various stages of growth, from early-stage startups to mature businesses on the cusp of an IPO.
One of the most compelling opportunities in unlisted markets is the potential for significant returns. Early-stage investments, though high-risk, can yield exponential gains if the company succeeds. For instance, investing in a startup that later becomes a market leader can provide returns far beyond what is typically seen in listed markets.
Moreover, unlisted markets offer a chance to invest in niche sectors and emerging industries that may not yet be represented in the public domain. This can include cutting-edge technology firms, disruptive business models, and companies with strategic patents that could redefine industries. Such investments can be strategically beneficial, especially for diversifying their portfolios beyond conventional asset classes.
Let’s look at some past performances of the unlisted market to understand its lucrativeness:
Anand Rathi Wealth Management Services: The Anand Rathi shares were available at just Rs 267 only and today it is available in the listed market for Rs 3,908 only showing an exorbitant absolute growth of 1363%. In other words, an investment of Rs 10 Lakh in Anand Rathi would have made Rs 1.363 Crores.
Tata Technologies: Let’s take the example of recently listed Tata Technologies. It used to be available in the unlisted market for Rs 90 a couple of years ago and today it is listed at Rs 1,022 in the listed market, recording an absolute growth of 1035%. In other words, an investment of Rs10 Lakh in Tata Technologies would have made Rs 1.035 crores.
Challenges
While the opportunities are enticing, unlisted markets are fraught with challenges that require careful navigation. One of the primary concerns is the lack of liquidity. Unlike listed stocks that can be bought and sold easily, unlisted shares often require longer holding periods, and finding buyers can be challenging. This illiquidity can be a significant drawback for investors seeking quick exits.
Security transaction and delivery are a major concern for investors. Unlike the listed market where securities are delivered in the dematerialised form, securities in the unlisted market have no such compulsion. At this point investors can seek the services of trusted platforms that deliver shares in T+0 days in dematerialised form, right in the account of shareholders.
Regulatory compliance and governance also pose significant challenges. Unlisted companies may not be subject to the same stringent regulations as listed entities, which can result in variations in corporate governance standards. Investors must exercise due diligence to ensure that the companies they invest in adhere to robust governance practices and maintain accurate financial records.
The rise of unlisted markets represents a significant shift in the financial landscape, offering unparalleled opportunities for high returns and portfolio diversification. However, these markets come with their own set of challenges, from liquidity constraints to valuation transparency and governance issues. For CEOs and investors alike, navigating this terrain requires a blend of strategic foresight, robust risk management, and effective delegation. By understanding and addressing these dynamics, market participants can unlock the full potential of unlisted markets, driving growth and innovation in the years to come.
(The writer is Founder & CEO of Planify)