Lock-ins, and the liquidity you are actually buying

Two positions can carry the same valuation and be worth materially different amounts. The difference is when you are permitted to sell, and pre-IPO allocations almost always come with an answer that is not "whenever you like".

Where the restrictions come from

They arrive from several directions at once, and they do not all expire together.

• Anchor investors in a public issue are locked in after listing, with a portion released earlier than the rest

• Pre-IPO shareholders are typically subject to a holding period running from the date of allotment or listing

• Promoter and pre-issue capital carries its own restrictions under the issue regulations

• Contractual lock-ups agreed with the company or the bankers may run longer than any of the above

The practical consequence is that a listing is not an exit. It is the start of a window that opens in stages, sometimes over several quarters, and the price at each stage is whatever the market offers on that day rather than the one on the listing screen.

Why the constraint is also the point

It is tempting to read a lock-in as a cost to be minimised. It is more useful to read it as information.

A participant who can sell immediately is saying less by participating than one who has agreed to hold. The commitment is part of what the allocation buys.

An anchor allocation exists precisely because the company and its bankers want capital that will not leave on day one. That is why anchor participation comes with access to management and to the pricing conversation. The lock-in is what is being exchanged for it.

What this means for the entry price

If the position cannot be realised for several quarters, the entry price has to carry that. This is the illiquidity discount, and it is not a rule of thumb applied at the end of a valuation. It follows from how long the capital is committed and how uncertain the exit is.

• How long until the first tranche is free, measured from allotment rather than from today

• What proportion is released at each stage, and over what period

• Whether the expected volume at listing could absorb the position without moving the price

• What happens if the listing is delayed, which is the case the discount is really for

That last question is the one most often skipped. A pre-IPO entry priced for a listing six months away is a different investment if the listing takes two years, and issuers do not control the timing as tightly as a pitch implies.

Nothing here is a projection or a recommendation. Lock-in periods are set by regulation and by the terms of each issue, and the specific periods applying to any allocation are set out in that issue's documents.