Investing is gaining increasing traction in Nigeria as more people look beyond traditional savings to protect and grow their wealth, particularly amid elevated inflation. This growing interest has expanded participation in the capital market and increased awareness of opportunities such as public offers, IPOs and private placements. As these opportunities emerge, understanding how they work, and the risks involved, is becoming increasingly important.
Imagine receiving a message saying: “A new company is offering its shares to investors. You can become a shareholder by investing as little as ₦50,000.” Would you invest immediately?
For many retail investors, the answer may be yes, particularly if the company is well known or the offer is generating significant attention. But before committing your money, there are some basic questions you should ask: What exactly are you buying? Why is the company raising money? How much are the shares worth? What will happen to your investment after you buy the shares? And most importantly, what could make you gain or lose money?
This is where understanding an Initial Public Offering (IPO) and a private placement becomes important. Both allow companies to raise capital from investors, but they differ in how the investment is offered, who can participate and the options available to investors after the investment is made.
Understanding the difference, however, is only the starting point. The more important question is whether the investment is worth your money. That requires looking beyond the offer itself to understand the business, why it is raising capital, how the funds will be used, the price at which the shares are being offered and the risks involved.
What Is an IPO?
An Initial Public Offering, commonly called an IPO, occurs when a private company offers its shares to the public for the first time, usually with the intention of becoming listed on a stock exchange. Now, think of it as a company opening its ownership to a much larger pool of investors. Instead of being owned mainly by its founders and early investors, members of the public can now buy a stake in the business. For example, if a company wants to raise ₦100 billion to expand its operations, it can offer some of its shares to the public. If you subscribe and receive the shares, you become one of the company’s shareholders. The funds raised may be used to expand the business, build new facilities, fund new projects or reduce debt. Hence, one question should always come first: Why does the company need the money? A company raising capital to expand a profitable and growing business may present a different investment opportunity from one raising funds mainly to meet financial obligations or cover recurring expenses.
What Is a Private Placement?
Private placement is another way for a company to raise capital by offering shares or other securities to a selected group of investors rather than to the general public. Unlike an IPO, participation is generally limited to specific or pre-arranged investors who meet the requirements of the offer. Private placements may also have specific terms, restrictions and exit conditions.
What Should You Consider Before Investing?
Now that you know the difference between an IPO and a private placement, here are some factors you should put into consideration or mistakes you should avoid when deciding which of the options you should opt for:
Don’t Invest Just Because Everyone Is Talking About It
One of the biggest mistakes an investor can make is assuming that every IPO or private placement is a good investment. A popular company can still be a poor investment if you pay too much for its shares. Similarly, a company operating in a fast-growing industry may have strong prospects but still carry significant risks.
Before investing, take a step back and understand the business. Some of the pertinent questions to ask include: What does the company actually do? How does it make money? Is the business growing? Is it profitable? Does it have excessive debt? Who are its major competitors? Why is it raising money? How will the funds be used? These questions can tell you much more about an investment than how popular the offer is.
The Price Matters - A good company can still be a bad investment if you pay too much for it.
Even if you like the company, you still need to consider how much you are paying for it. Imagine two shops generating similar profits. If one is being sold for ₦10 million and the other for ₦100 million, would you automatically choose the more expensive one simply because it is a good business? The same principle applies to shares. You should assess whether the offer price (price at which the shares is sold) is reasonable relative to the company’s profits, assets, growth prospects and the valuations of similar listed companies. This sounds ambiguous right! You can always reach out to experts like “I-invest” to get guidance and insights.
Read the Offer Document
Before subscribing to an IPO or private placement, you should read the relevant offer document. It contains important information about the company, the investment and the terms of the offer. Pay attention to: The company’s financial performance, how the company makes money, how the funds will be used, the risks facing the business, existing debt obligations, ownership structure, management experience, the offer price, dividend expectations, whether and when the shares will be listed, any restrictions on selling the investment Do not rely solely on what you hear from friends, social media or marketing materials. Your investment decision should be based on information, not excitement.
What Happens After You Invest?
Buying the shares is not the end of the investment decision. If the company is listed, its share price can rise or fall depending on its financial performance, investor sentiment and broader market conditions. Even a strong business can experience periods of declining share prices. This is why you should have a clear understanding of why they invested in the first place. If the business continues to perform well, short-term price movements may not change the long-term investment case. However, if the company’s financial position deteriorates, its competitive position weakens or the original investment thesis no longer holds, it may be time to reassess the investment. For private placements, investors should pay even closer attention to the exit mechanism, particularly where there is no immediate secondary market for the investment.
IPO or Private Placement: Which Is Better?
There is no universal answer. An IPO may appeal to those who want to participate in a company’s growth and, where the shares are listed, have the ability to trade their investment on the stock exchange. A private placement may provide access to a specific investment opportunity, but you need to pay particular attention to its terms, risks and exit options.
The better question is not “Which one is better?” It is “Is this particular investment right for me?” The answer depends on the quality of the business, the price you are paying, the potential return, the risks involved and how long you are willing to keep your money invested.
The Bottom Line
An IPO or private placement is not a shortcut to making money. It is simply another way of investing in a company. But before investing, remember three things:
Understand the business. Know what the company does, how it makes money and what it plans to do with the funds raised.
Understand the price. A good company is not necessarily a good investment if its shares are overpriced.
Understand the risk. Know what could go wrong and how easily you can exit the investment.
Ultimately, successful investing is not about following the crowd or participating in every new offer. It is about understanding what you are buying, paying a reasonable price and making an investment decision that fits your financial goals and risk tolerance.
