Pre-IPO funds are often considered to be the safest form of unlisted investing (please note, that all unlisted funds are typically higher risk-reward than even the most aggressive listed equity funds). Since Pre-IPO funds typically invest in more known & mature businesses, that are typically slated for an IPO in a 1-2 year period, the risks of business failures & exit risks common in venture capital funds are substantially lower.

However there are some important risks to keep in mind while investing in Pre-IPO funds:

• Dependence on an IPO Market: IPO markets tend to be more active in bullish market conditions because investor confidence is higher, leading to greater demand for new stock offerings, which can drive up valuations. In contrast, IPOs can be difficult in bearish market conditions as investors are more risk-averse, reducing demand and making it harder for companies to achieve favorable pricing. In case market conditions are not conducive at the time when the fund is seeking to exit investments, they may have to be willing to (a) exit at less favourable valuations (b) extend the fund to wait for IPO markets to improve (c) exit via either a secondary sale to other unlisted investors, the promoters or via a company buy-back.
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• Valuations at the time of entry: Pre-IPO funds may invest at inflated valuations during periods of high bullishness in the unlisted market, driven by overly optimistic expectations of future growth. Even if the company eventually goes public, these high entry valuations can limit the upside potential, making it challenging for the fund to achieve strong returns.
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• Failure of an IPO: Even in strong IPO market conditions, there are cases where IPO's can fail (for any number of reasons). In case a funds investments does not manage to successfully close the IPO, the fund will need to seek exits from other means - typically via either a secondary sale to other unlisted investors, the promoters or via a company buy-back.

Effectively, in order to generate the desired levels of returns, it is important that a Pre-IPO fund be able to make investments at reasonable valuation multiples at the time of the investment, and that IPO market conditions remain favourable to allow for an exit with the desired levels of returns.