Starved Russian brokers crowdfund for pre-IPOs

Starved Russian brokers crowdfund for pre-IPOs
Russian equity brokers have started offering unqualified retail investors investment opportunities at the pre-IPO stage. / bne IntelliNews
By bne IntelliNews August 19, 2022

Russian equity brokers have started offering unqualified retail investors investment opportunities at the pre-IPO (initial public offering) stage, The Bell and Kommersant daily reported citing a new product by Alfa Investments, part of the sanctioned Alfa Group of billionaire Mikhail Friedman and Peter Aven.

As followed by bne IntelliNews, prior to the military invasion of Ukraine the Russian equity market was going through an IPO boom, in part fuelled by the retail investment revolution.

But as the barrage of Western sanctions has Russian issuers cut off the global financial markets, the investment bankers need to get creative to raise equity for their clients. 

Reportedly, now Alfa Investments is the first to raise retail funds for pre-IPO equity investment through a mobile app with the minimum lot size of only RUB10,000 versus pre-invasion threshold of tens of thousands of US dollars. 

The crowdfunding is being organised through Alfa Bank's partner, the investment platform company Rounds (formerly StartTrack), according to Kommersant. The first company on the platform will be foodtech startup Mealjoy, with whose shares can be purchased until August 30. 

The crowdfunding market previously grew actively: in 2021 it stood at RUB4.7bn (36% of total equity raised from retail clients), but dropped to RUB1bn in 1Q22.

Previously pre-IPO products have been provided by other brokers, such as BCS, Renaissance Capital, Tinkoff Investments, Finam, but only for qualified investors and with a much higher entry threshold (from $1mn for large investors and from $50,000 and above for medium-sized investors). 

Only 550,000 Russians, or less than 1% of the economically active population, had qualified investor status as of August 1, 2022. And out of about 27mn individual brokerage accounts in Russia, 65% remain inactive and contain no funds.

Analysts surveyed by Kommersant and The Bell believe that pre-IPO projects could be interesting to a certain narrow circle of retail investors, but such investment format is not widespread in Russia due to the numerous barriers to start-ups. 

Pre-IPO products that do not involve direct distribution of shares to the investors could be more complex for unqualified investors to grasp, and ultimately much riskier. This is why such products are very likely to be shut down by the Central Bank of Russia (CBR). As followed by bne IntelliNews, the regulator is now concerned that unqualified individual investors will find it hard to navigate the heavily sanctioned financial market.