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Understanding Pre-IPO Loans

4th Dec 23
Zara Akbar HEAD OF SECURITIES-BASED LENDING

Zara Akbar

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HEAD OF SECURITIES-BASED LENDING

Zara Akbar

The tail end of 2023 has seen Softbank's ARM, Instacart and Klaviyo all become public companies, ending something of a dry spell for household name IPOs. While many companies have continued to list throughout 2023 - some very successfully - there is a significant decrease in the number of IPOs this year, with about 30% fewer companies listing this year compared to the same period in 2022. Many companies were waiting to see how geopolitical uncertainty, banking sector volatility, a general slowdown in some parts of the tech sector and high interest rates would play out and affect valuations and demand before listing. However, it's thought that TikTok, Stripe, Reddit, and Discord are all mulling an IPO in Q3 2023 or 2024, with the September 2023 round of IPOs potentially being the start of more companies floating on stock markets as firms look to reap the benefits of going public. 

 

Pre-IPO Loans

Pre-IPO loans can be useful if you own equity in a valuable, growing company planning to list in the short to medium term (12-18 months). While equity in such companies can become highly valuable after the IPO as your shareholding is generally more liquid, this is of little help if you need to access capital in the short term while it is still private. 

This is why pre-IPO loans are becoming more common and in-demand, as they allow you to use your equity to access capital without necessarily selling your shareholding. A lender will use your equity in a private company that will float on a stock market as collateral for a loan, offering you a credit line in return. Only specialist and highly experienced lenders operate in the space, given underwriting, valuing pre-IPO stock, and the legal expertise required to arrange this type of loan is especially complex and multifaceted. 

Pre-IPO loans can carry more risk than a securities-backed loan collateralised against a diverse portfolio of high-volume stocks listed on major exchanges because there are so many unknowns. For example, the lender needs to understand and navigate complexities such as potential dilution of equity (if more shareholders or investors inject liquidity ahead of an IPO), valuation of the company after it floats, potential cash-flow challenges, little enthusiasm for stock upon listing, quick down-valuations after listing and so on.

As a result, lenders usually offer lower loan-to-value ratios for pre-IPO loans than for other types of securities-backed loans and, in some cases, will charge more interest and higher fees than you'd see for a more vanilla Lombard loan against listed and liquid stocks. Pre-IPO loans can still be quickly arranged (you can draw down funds in a matter of weeks). However, because these transactions require careful negotiation and arrangement, many lenders will usually only offer pre-IPO loans for larger deals, upwards of $1 million or so, against equity in pre-IPO shares valued at at least $3-5 million.

 

What Determines How Much You Can Borrow?

Every pre-IPO loan is tailored and priced to order: lenders will set the interest rate, LTV and the amount you can borrow based on various points. These will include, but are not limited to:

  • The lender's valuation of your equity in the company (which can differ from generic market valuations and/or the company's estimation of its own valuation)
  • The timeline of when the company expects to list, the valuation of the company at that time and the expectations of subscriptions/how much demand is expected when the company floats
  • What is likely to happen to the business after the IPO (if management stays on board, new team members will be bought in, etc.)
  • How you will exit the loan (especially if you will exit the loan before or after the listing, given the impact this can have on your equity/shareholding)
  • How much you want to borrow against the value of your shares
  • Legal considerations like lock-up periods, covenants and policies that will affect share ownership and/or share transfers 
  • The overall risk level of the transaction. Here, lenders will consider many different factors, including the sector the company operates in, services/products the company sells, the size of the company, demand for shares post-IPO, etc.

 

Other considerations

Lombard loans are generally collateralised against listed stocks with varying degrees of liquidity. In contrast, pre-IPO loans are secured against equity in a private company that will ultimately be floated on the stock market. The fact that in a pre-IPO loan, the borrower is essentially looking to use non-listed (and therefore less liquid) stocks as collateral for a loan can add a degree of complexity to pre-IPO lending as it’s harder for lenders to sell or transfer the equity in case of a margin call or default. These transactions can also be more complex to arrange from a legal perspective than Lombard loans and different types of securities-backed lending, as there are often covenants and constrictions surrounding share ownership that lenders will need to consider and work around when executing the loan. 

Pre-IPO stock loans are offered on a truly case-by-case basis. Most lenders can consider lending to shareholders with equity in successful businesses that have publicly announced that they intend to list within the next 12-18 months, or (preferably) have already started the IPO process. Floating a company is a huge undertaking, and knowing exactly when a company will go public is not always possible. Lenders are, therefore, somewhat flexible on this point, provided an IPO is definitely planned, and there is documentation to support this, even if the date if the IPO isn't certain.  

Overall, this type of transaction can carry a high level of risk for both lenders and borrowers. Lenders may offset this by offering low loan-to-value ratios and seeking a portion of the upside of the share value post-IPO. For your part, remember that taking a company public always carries risk: there is a chance that your equity will lose value after the IPO. Understanding the risks, having access to partners who can guide you through complexities and having a firm grip on the conditions and details of any loan you are offered will be critical to success. Working with partners like Enness will make the process easier and faster. You'll get the best finance and terms for your situation.

 

Get In Touch

Enness arranges high-value, pre-IPO loans. Contact us for an informal and no-obligation chat about pre-IPO loans and if this type of finance could be a good solution for you. We’ll answer any questions you have about this kind of lending and assess your equity and how it is structured to ensure nothing restricts you from accessing this type of loan. If a pre-IPO stock loan is possible, Enness' team will review the details and your needs and explain how we will negotiate and arrange a loan for you and what the best deal will look like.

 

 

Enness does not give advice on Securities Backed Lending or Luxury Asset Financing, and lender introductions are unregulated.
This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation and is not an invitation to buy or sell securities.
The views and opinions expressed in this piece are those of the author and do not constitute advise or a recommendation
They do not necessarily reflect the official policy or position of Enness and are not intended to indicate any market or industry viewpoints, or those of other industry professionals