I’ve been outlining some potentially lucrative Momentum investments. Here are several more.
Private Equity Investments With 5 Day Weekend
Private equity investments are essentially investing in start-ups, but are administered by firms that specialize in acquiring equity ownership in companies. Investing in a private equity fund usually requires a $250,000 minimum investment and can sometimes require up to $1 million or even more.
This can be a good way to go if you don’t have the time or knowledge to personally invest in companies yourself. Private equity firms with experience, training, and skill perform all the due diligence on business opportunities. They use your investment to acquire business ownership and pay you a return based on the performance of the businesses within the fund.
Initial Public Offerings (IPOs)
An Initial Public Offering (IPO) is the process where a privately owned company becomes a publicly traded company on the stock market with its initial sale of stock. The common shares are made available to outside investors on a public stock exchange. Essentially, companies that do this are securing capital to expand their business, purchase assets or pay off debt.
For investors, the market for initial public offerings is mixed. Some are IPOs riskier than others and some have more potential for higher rewards. First-day returns for popular IPOs are usually high due to their speculative nature and high demand. Other IPOs have historically underperformed for up to two years after going public.
One share of Google in 2004 at its initial public offering price was $85. Google is up 1,700% since its IPO. Opening shares of LinkedIn closed at $94.25, about 109% above the $45 IPO price. Facebook’s IPO shares closed at $38.23. In its second full week of trading on June 1st, the stock was valued at $27.72 per share. By June 6th original Facebook investors had lost a total of $40 billion. Facebook did not trade over $38 until 15 months later. Groupon is still not profitable and its share price is down by 80% since its IPO.
For investors wanting to get into IPO investing, it may be prudent to wait for the initial IPO hype to fade before acquiring the stock. This may mean buying the stock three months after it starts trading. After a few months the price of the stock moves more according to market fundamentals than the speculative hysteria preceding it.
You also need to be aware of the “lock-up period” associated with IPOs. An IPO lock-up period is a contractual restriction that prohibits company insiders from selling the stock before it goes public. It usually lasts between 90 to 180 days after the company goes public. When the lockup period expires, insiders are permitted to sell their stock. This could unleash a potential rush of insiders trying to sell their stock to realize quick profits. Any excess market supply can create severe downward pressure on the price of the stock.
Some investors assume an IPO is an opportunity to get in on the ground floor. In reality, a company prior to its IPO may have secured multiple rounds of investments. By the time you acquire shares of a company during the IPO, early private institutional investors are existing shareholders.
The lack of availability of stock may be another issue. The underwriting investment bank, which satisfies all regulatory requirements and filings for the IPO, sells IPO shares to their favored customers, usually big mutual funds, insurance companies, and pension funds. There may be a limited amount of shares made available to public,preventing them from acquiring stock due to over subscription.
A pre-IPO fund’s investment strategy is straightforward: Accredited investors purchase shares of companies before it is ready to issue an initial public offering. The investors plan to sell publicly after the IPO and capture any potential profit. You can get involved in pre-IPO funds by joining an angel investment group, or investing in a hedge-fund or venture capital fund that invests in startup companies.
The investment in an unlisted company (pre-IPO) presents a risk of partial or total loss of capital. Do your due diligence and look for companies to invest in that have completed the riskiest phases of their product development. Ensure the company has achieved proof of concept on the technical and commercial level of product development. Invest only in companies where you understand the product sector and its business model. Never invest money that you might need over the short or medium term.
I will continue in my next post to paint a picture of the landscape for alternative momentum investments.
In the meantime, what are your thoughts on these so far? Are these viable possibilities for you at some point in the future? Thank you for sharing.
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