Perils of investing in unlisted shares: PharmEasy, Reliance Retail hurt traders who invested on FOMO

We have all heard the expression, "The early bird gets the worm," in one form or another. Institutional investors have been trying to get in on the ground floor of a promising company in order to maximise their earnings for many years. High net-worth individuals (HNWIs) have followed the crowd and chased for Pre IPO shares, but a few recent incidents have served as a rude awakening. The promoter entity of Reliance Retail has made headlines by announcing that all equity shares held by non-promoters will be cancelled. The corporation has made a unilateral decision to compensate other shareholders Rs 1,362 per share to lower the equity capital controlled by the company. Before recently, these shares were sold in the private markets for between Rs 2,400 and Rs 3,000. EY and BDO, two consulting companies, estimated Reliance Retail's worth at $92–96 billion. With a share price of Rs 3,000, Reliance Retail would be worth more than USD $300 billion, surpassing the whole market capitalization of Reliance Industries. Wow, that's incredible.

PharmEasy also seems to be a mystery. In October 2021, after spending Rs 4,500 crores to acquire the "Thyrocare" diagnostic chain, the company obtained funding at a valuation of $5.6 billion. The share price of PharmEasy quickly increased from Rs 90 to Rs 135 on the private market as news about the company spread. After that, however, PharmEasy ran into trouble and was unable to successfully raise its subsequent round of funding. The Thyrocare transaction was heavily financed by debt, and now that loan must be repaid. There was no way around the higher cost of capital and the inability to go public. At a valuation 90% lower than its last deal, the company is negotiating a rights issue to raise Rs 2,400 crore. 

All of these actions are indicative of FOMO. As investors, we're always looking to capitalise on the newest investment trend for fear of missing out. Fear, though, might cause us to act rashly and make poor investment decisions.

What can one learn from these examples

Never mimic Institutional Investors: 

Private equity (PE) firms and venture capital (VC) funds are very distinct in their investment horizons and risk appetites. They are more obedient to "Power Law" since they diversify their investments. In addition, VC Funds typically benefit from favourable deal terms. Liquidation Preference & Anti Dilution Rights are commonly used by VCs. PharmEasy's Anti-Dilution rights guarantee that investors who contributed during the transaction that resulted in a $5.6 billion valuation will get no less than an equal number of new shares should the company subsequently raise capital at a lower valuation. The venture capitalists will receive 10 times as many shares in a round that is conducted at a 90% lower valuation. High net worth individuals who purchased the stock on the open market are not covered.

Don’t Catch A Falling Knife:  

Intelligent investors know that it is better to average up than average down. If you initially purchased PharmEasy shares at Rs 100/Share, you may consider your average has come to Rs 75/Share and it would be sensible to acquire more at the current price of Rs 50/Share. However, you've lost even more money now that the price is so much lower. It's a waste of good money to invest in terrible companies. 

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Be Willing to Wait for a Liquidity Event: 

Even for established, profitable businesses, the time it takes to go public could be much longer than expected. Potential causes are limitless. NSE is a fantastic example of a cash-generating corporation that keeps getting delayed from going public because to regulatory concerns, despite the fact that its earnings have doubled in the last few of years. If you're desperate for cash, the private market is always there for you to sell at a discount.

Having said this, pre-IPO investing has a lot of merit and should be part of the “satellite” allocation of the portfolio, provided:

• The allocation is within your risk framework.
• You are patient enough to hold these investments eternally without touching them for the foreseeable future.
• You have help from your advisors to overcome information asymmetry. 

It's an exciting time to be a risk investor in India, and eventually the market there will catch up with the times and treat modern enterprises as they should be treated. The goal for an investor is to make cautious but well-informed bets over time.