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Pre-IPO investments

Discussion in 'Shares' started by Simon Hampel, 6th Feb, 2006.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I was wondering how many people have invested in pre-IPO companies ?

    By this I mean, companies that are planning to list on the stock exchange in the near future and require funding to get to the point of listing.

    Although NavraInvest is kind of in this situation - it was never sold as a "pre-IPO" investment, more of a longer term deal ... so let's not consider NavraInvest in this discussion.

    An example that comes to mind that many might be aware of (because of involvement with Somersoft and the member there who was promoting it) is Central Petroleum ... which has had a bit of a rocky road to listing, but finally looks like listing next week. (Disclaimer - I own shares in Central Petroleum)

    Has anyone else made similar investments ?

    I would imagine this would come under the category of "speculative" or "high risk" investments and people would generally only allocate a small percentage of their portfolio to such stocks.

    Comments on the concept in general ? Experiences ?
     
  2. gazza

    gazza Well-Known Member

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    Sim

    Like you, I have invested in Central Petoleum and am looking forward to a listing in the next couple of weeks. I have also invested in another junior oiler that is working towards a listing in the next 6 months. My experience in the past with these sorts of investments has been mixed - one company listed but after a short burst, it's share price fell dramatically and it's pretty much worthless now (I sold out after a while and lost about 60% of my investment - you always tend to hope against hope that it will rebound), the other one has not yet listed (after 8 years). Not only that, the company went into receivership and was taken over by another group leading to a stock consolidation (for every 5 you now only had 1) which means I now have many less shares of no value.

    Bottom line - these are highly speculative investments. From my perspective you should only invest if you are prepared to lose all your money.

    Gazza
     
  3. Tropo

    Tropo Well-Known Member

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    'Bottom line - these are highly speculative investments. From my perspective you should only invest if you are prepared to lose all your money'.

    Gazza,
    Well said !!!!! :)

    Sim,
    Long time ago I bought shares on issue (not knowing what I was doing at that time !!), and it was just luck that I made some money.
    This way of investing is very risky indeed, unless you can effectively trade shares which you bought on issue and this is only short (few days) term trade.
    :cool:
     
    Last edited by a moderator: 7th Feb, 2006
  4. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Sim,

    I'm not in Central Petroleum, but I have bought a sizeable stake pre-IPO in Northern Territory Oil (NTO) which is also the product of a certain SS patron. I'm looking forward to Central listing so some of those funds can be freed to flow towards NTO. They're looking at listing in the next 6 months or so. If they do then I can pull my seed capital out if I choose to and still retain the same value of shares as my seed since its listing at double my issue price. I also get some short and long dated options which sweetens the pie.

    Time will tell if it works out but I'm optimistic of the listing going successfully which means worst case I'll be money back. If they die from there then I've lost nothing. But that all pre-supposes a successful listing. That's what I've taken a punt will come off, and with oil at US$70 that doesn't seem like too much of a stretch.

    Cheers,
    Michael.
     
  5. gazza

    gazza Well-Known Member

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    Also bear in mind that if you have held the pre IPO shares for less than 12 months, you can only withdraw the equivalent amount of your initial investment upon listing. For example , if you bought 1000 shares at $1 , pre IPO and the company lists 6 months later at $2, you will only be allowed to sell 500 shares ie recover your initial investment of $1000. BTW this is pretty much my exit strategy with Central and NTO - recover my initial investment upon listing and then keep the remaining shares and see how things pan out.
     
  6. Nigel Ward

    Nigel Ward Team InvestEd

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    Apart from knowing one of the promoters, what were the key things you looked at when investing in these floats as opposed to all the other penny oil explorers out there?

    I think we'd all benefit from getting inside your respective analyses... :)

    Thanks
    N.
     
  7. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Nigel,

    I looked at cash flow predominately. The risk with penny oilers is that they spend all their seed capital in exploration drilling wells, and end up worth nothing and going to the market cap in hand again. My primary questions related to expenditure and ongoing source of funds etc. I also wanted as firm as possible commitments around list dates so that I could recover my seed capital as Gazza outlined above.

    NTO have a Texas holding with an actual producing well. This will help them with their cashflow and allow them to continue with the exploration of their greenfields. Thats a bit more robust a model than Central, but even Central are doing really well it would seem from their listing. Of course I was interested in the geology of their greenfields too, but that's a secondary concern as my primary concern is maintenance of capital by seeing it through to a successful listing. But, a successful listing would be dependent on the nature of their greenfields so I figured this was important...

    Its very speculative stuff but with the potential of significant upside longer term. If it lists OK then I pull my seed and I'm neutral after only a couple of months. Then wait and see what pans out with those long dated options.

    Cheers,
    Michael.
     
  8. gazza

    gazza Well-Known Member

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    Nigel

    Besides Michael's comments, I also looked at exit strategies and whether they needed to actually hit oil to make money. Neither do, they have plans for farm in arrangements, joint ventures and most importantly control large tracts of unexplored land with the 'potential' of having oil reserves. I think it's that potential which makes these small companies attractive to bigger operators in terms of takeovers, etc.


    Gary
     
  9. Glebe

    Glebe Well-Known Member

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    Yeah I've got money in NTO also. Can't say I did that much research - I treated it as a bit of a bet and only gambled what I could afford to lose.
     
  10. Tropo

    Tropo Well-Known Member

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    I would imagine this would come under the category of "speculative" or "high risk" investments and people would generally only allocate a small percentage of their portfolio to such stocks.

    Comments on the concept in general ?


    Sim,

    Below there are a few most common 'traps' why some investors are losing money.

    - they speculate when they think that they are investing
    - they speculate seriously when they lack proper knowledge and skill for it
    - they risk more money in speculation than they can afford to lose.
    - they buy 'hot' common-stock issues or make a purchase of other stock in the very similar way.

    If you want to try your luck, put aside a portion of your capital in a separate account for this purpose.
    Do not add more money to this account only because you are making profit, and do not use margin loan.
    Note: The most new issues are sold under "favorable market conditions" which means, good for the seller and less favorable for the buyer.
    :cool:
     
  11. johnnyb

    johnnyb Well-Known Member

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    Sorry, this is an old thread that I came across when searching for something else. But there is a question I have on gazza'a comment.

    I understand the stuff about only being able to recover your initial investment if held for less than 12 months. In this case though won't you be hit for CGT. So, in gazza'a example, for the 500 shares you sell at $2, you have actually made a $500 capital gain, which you will have to pay tax on.

    Is my understanding correct? If so then it is not possible to recover your initial investment if you've only held the shares for less than 12 months. (Sure, you may get pretty close to recovering the initial investment depending on your marginal tax rate etc, but I'm really just asking about the principle).

    John.
     
  12. johnnyb

    johnnyb Well-Known Member

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    *bump*

    I am really interested in the answer to my question above, so thought I'd push this thread up again.

    John.
     
  13. johnnyb

    johnnyb Well-Known Member

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    OK, one more try - does anyone have a response to my query above?

    Thanks.

    John.
     
  14. NickM

    NickM Co-founder Staff Member

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    Johnny
    My view would be that from a tax perspective you bought 500 shares at $1 each then sold 500 shares for $2. CGT would be payable on the gain.

    Nickm
     
  15. TakeStock

    TakeStock Well-Known Member

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    I think you are correct.
     
  16. johnnyb

    johnnyb Well-Known Member

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    Thanks for your replies Nick and TS. I'm glad that you have confirmed my understanding - I thought I might have been missing something fundamental (again) :)

    John.