How to Choose Unlisted Shares: A Guide for Indian Investors

Tue, 26 Nov 2024

5 mins

The Indian wealth management landscape has evolved significantly, and with the rise of pre-IPO investment opportunities, unlisted shares have become an attractive asset class.

For high-net-worth individuals (HNIs), unlisted shares offer potential for substantial long-term returns, diversification, and early access to promising companies. However, selecting the right unlisted shares requires a well-informed approach, considering the unique dynamics of the Indian market.
In this blog, we explore how to choose unlisted shares wisely, while addressing key factors that can impact decision-making.
 

• Understand the Industry and Business Model

  When selecting unlisted shares, the first step is to understand the company's business model and the industry it operates in. Look for companies that operate in sectors with growth potential, such as technology, healthcare, fintech, or green energy.
  
  Example: Companies like Swiggy and Ola in the technology-driven service sector have attracted early investments due to the rising demand for delivery and ride-hailing services.
  
  It’s crucial to assess whether the company's business model is sustainable and scalable in the Indian context, where market conditions, consumer preferences, and regulatory frameworks differ from global counterparts.

• Evaluate the Financial Health Indicators

  Before investing, always check the company’s financial performance. Key metrics like revenue growth, financial statement analysis, profitability, and cash flow sustainability offer insights into a company’s financial strength. In India, platforms such as the Ministry of Corporate Affairs (MCA) database or Tofler can provide access to financial statements of private companies.
  
  Stat: A report by VCCircle found that around 40% of India's top unlisted firms grew their revenue by more than 20% in 2022. This indicates a robust opportunity for HNIs in the unlisted space. Companies with strong fundamentals and a proven ability to generate consistent revenue are better candidates for investing.    

• Assess the Management Team

  Leadership plays a critical role in driving a company's success. For unlisted companies, where information may be limited, pay attention to the qualifications, background, transparency, expertise, and track record of the management team.
  
  Pro Tip: Look for founders with a history of successful ventures or those who have previously led start-ups through funding rounds or IPOs. Assess whether the leadership has a clear vision and the capability to steer the company through challenges, particularly in India’s dynamic economic environment.  

• Review the Company’s Growth Stage

  Unlisted shares typically belong to companies in different stages of growth—early-stage startups, mature pre-IPO companies, or spin-offs. Each presents distinct opportunities and risks. Knowing the growth stage of the company can guide you towards an ideal purchase.
  
  Early-stage companies may offer higher returns but carry greater risk due to their untested models. Mature pre-IPO companies, on the other hand, have established their market position and are preparing for an eventual public listing, offering a more stable investment.  

• Examine Market Trends and Regulatory Environment

  Understanding market trends and regulations affecting specific sectors is crucial. In India, regulatory policies can shift dramatically, impacting sectors like fintech, e-commerce, or electric vehicles. It’s important to stay updated with government announcements or guidelines that could influence your investment.
  
  Example: In 2021, the Indian government’s move to regulate cryptocurrencies led to fluctuations in companies operating in this space. Investors should consider how regulatory changes may affect the companies, which they are evaluating for investment.  

• Assess the share valuation and purchase accordingly

  One of the biggest challenges when investing in unlisted shares is determining the right valuation. Since these companies aren’t listed on the stock exchange, they don’t have a market-driven price. Instead, valuations are based on a mix of metrics like revenue, earnings, market trends, and the potential for future growth.
  
  Fact: According to PwC India, the valuation of unlisted tech companies in India rose by 18% in 2023, driven by growth in digitalization and demand for tech-driven solutions. It's critical to assess whether the current valuation is justified based on the company’s financials and future potential. Look for opportunities to enter when valuations are reasonable and avoid overpaying for overhyped companies.  

• Look into Liquidity options and plan Exit Strategy

  Since unlisted shares are not traded on stock exchanges, liquidity is a major concern. Investors need to have a clear exit strategy in mind, as selling unlisted shares can be challenging and often depends on events like IPOs or acquisition by a larger company.
  
  Stat: A study by EY India found that over 65% of unlisted companies in India experienced liquidity events within 5 years, often through M&A activity or IPOs. Investors should consider how long they are willing to hold the shares and the potential pathways to liquidity.  

• Monitor Peer Comparisons and identify which are the best Unlisted Shares to buy

  Analyzing similar unlisted companies in the same sector can provide valuable context. Investors can compare financials, management quality, market positioning, and growth potential to determine whether a company is a leader or a laggard in its industry.
  
  Example: Comparing pre-IPO unicorns like Byju's and Unacademy in the edtech sector can help investors identify which company is better positioned for future success. Peer comparisons help investors get a holistic view of the market and also assists identifying the right unlisted shares to purchase.  

• To bring it to a close

  Investing in unlisted shares can be a rewarding journey for investors seeking long-term growth and diversification. By evaluating the company’s business model, financial health, management team, and market trends, investors can identify high-potential opportunities in India’s burgeoning private markets. However, as with any investment, it is important to carefully weigh the risks, particularly around liquidity and valuation, before committing funds.
  
  Sources:
      • VCCircle Report
      • Indian Government on Cryptocurrency
      • PwC India Valuation Insights 2023
      • EY India Liquidity Events Study
      • Byju's vs Unacademy Comparison