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Tata Capital > Blog > Wealth Services > Factors an Investor Should Consider While Purchasing Unlisted Equity

Wealth Services

Factors an Investor Should Consider While Purchasing Unlisted Equity

Factors an Investor Should Consider While Purchasing Unlisted Equity

Unlike listed securities, unlisted equity represents shares in companies that are not traded on public stock exchanges. Unlisted equity investments can open doors to innovative startups, growth-oriented SMEs, and family-owned businesses with strong potential. 

This investment avenue often attracts investors looking to diversify their portfolio with potentially high-reward options. However, the lack of public trading means these investments come with their own set of risks and considerations, distinct from traditional stock market investments. 

From issues of liquidity and valuation to the need for thorough due diligence, unlisted equity demands a more hands-on and informed approach. In this blog, we'll highlight the critical factors that you must consider before diving into the world of unlisted equity.

Understanding unlisted equity

Unlisted equity refers to shares of a company that are not traded on a public stock exchange. These are typically shares of private companies, including startups, family-owned businesses, or SMEs. Since these shares cannot be bought or sold in the open market, they have low liquidity. 

Another challenge of investing in these securities is that information about unlisted companies can be less accessible, making it difficult to evaluate their performance and potential. 

Factors to consider when purchasing unlisted equity

When purchasing unlisted equity, investors should carefully evaluate several key factors to make informed decisions. These include:

1. Liquidity

Unlisted equities have limited liquidity. Unlike public stocks, you cannot easily buy or sell these shares on a regular stock exchange. This lack of liquidity means it might take longer to find a buyer, and selling the equity at a fair price could be challenging. Therefore, you must be prepared for a potentially lengthy holding period.

2. Valuation

Valuing unlisted equity can be complex due to the absence of market-driven price discovery mechanisms. It involves thoroughly assessing the company's financials, growth prospects, industry position, and other key metrics. An accurate valuation is crucial to avoid overpaying and to ensure a fair return on investment.

3. Future potential of the company

Evaluating the future growth potential of the company is critical. This includes analysing the business model, market size, competitive landscape, and growth strategy. Understanding the scalability of the business and its sustainability in the long run can give insights into its future performance.

4. Management team

The success of unlisted companies often depends on the strength and experience of their management team. Assessing the team's track record, expertise, and commitment can provide confidence in the company’s ability to execute its business plan and navigate challenges effectively.

5. Investment horizon

Unlisted equity investments typically require a longer investment horizon compared to traditional equity investments. Investors should be prepared for a longer commitment, as it may take time for the company to mature and realise its full value.

6. Exit strategy

Since unlisted equity has low liquidity, it is important to have a clear exit strategy. This might include selling the stake back to the company’s owners, selling to another private investor, or an eventual public offering of the company. Understanding the exit opportunities and timelines will help in creating an effective strategy and realising returns.

7. Diversification

It is important to balance your investment in unlisted equity with other asset classes such as listed equities, bonds, real estate, or even other alternative investments. This helps in mitigating risk and not overexposing your portfolio to the specific risks associated with unlisted equities, such as company-specific risks or sectoral fluctuations.

To sum up

Investing in unlisted equity can be rewarding but it also comes with its own set of challenges. Therefore, it's important to approach these investments with a thorough understanding of the associated risks and a well-considered strategy. Investors must conduct comprehensive due diligence and possibly seek expert guidance from Tata Capital Wealth to navigate the nuances of unlisted equity investments. 

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