The opportunity to get in early and buy shares before a company is floated on the stock market has produced very lucrative returns for some investors. But it is an opportunity that is only available to a limited number of private investors and it is not without risk.

When Riverdeep floated last week at $20 (€20.76) per American Depositary Share there were already a number of private investors on board. As clients of Davy Stockbrokers and Bank of Ireland Private Banking these shareholders bought shares in a private placing last October at an effective price of $6.75 per ADS.

As the shares surged from the $20 flotation price to $66.9 at the close of their first day on the Nasdaq market in New York, those shareholders saw a spectacular rise in the value of their investment. For example, a shareholder who bought in at $6.75 would have had a paper profit of $13.25 per share - just under double their original investment - immediately on flotation. By the close of business that day their paper profit would have jumped to more than $60 per share, just under nine times their original investment.

If a shareholder who spent $10,000 to buy shares in the private placing sold the shares at the top of the market on flotation day he could have made a profit of about $89,000 on the deal. But the Riverdeep shareholders who came in through the private placing could not sell on flotation day - under Nasdaq rules they had to agree to hold their shares for some months after flotation.

For the ordinary punter the first opportunity to buy Riverdeep shares came with the flotation when the price was $20 per share. But with the rapid surge in the share price and institutional demand, most punters will have paid more than $40 per share.

Opportunities to buy shares before a company is floated arise through private placings. Typically some time before it comes to the market a company will need to raise funds to build up its operation, or, in some cases just to keep the operation going. A company may have to raise funds a number of times before it is ready to float. Analysts describe the new breed of technology companies as having a "high burn rate" - a big need for cash. Most are at the stage of building their market shares, product suites and management teams and are huge consumers of cash, but are not yet generating the cash flow or profits to meet their needs. They need cash to get as far as the flotation stage. So a company planning to go to the market in, say, a year to 18 months will appoint specialists - usually a corporate finance firm - to advise on how best they can meet their funding needs. The firms may suggest a number of approaches depending on the size of the funding required and the estimated time span to flotation.

A fund-raising may be organised by approaching domestic and overseas institutional investors such as large pension or investment funds, venture capital institutions or the private clients registered with stockbrokers and the private banks, or a mixture of the sources.

The further away and the more uncertain the flotation prospects the more likely that the fundraising will be aimed at private clients, one broker suggested. These private clients are usually individuals with significant funds to invest who are known by the private banks or brokers to be interested in new investment opportunities.

These clients will be offered an opportunity to subscribe for shares in the company at a price set by the fundraising company and its advisers after an assessment of the likely demand at various price levels. They will not be offered any guarantees. Brokers explain that there is "no certainty offered to private clients when they come on board".

As one corporate finance specialist explained: "These are often fairly risky investments, some could be very high-risk. When the private client comes in there is often a plan to float. While there is a plan, it is still only a plan. Conditions in the market, in the sector, or, the technology involved can change and scupper that plan. So for the private investor there can be no certainty that the company will float and there can be no assurance as to the price the shares will be floated at."

So private clients get an opportunity to buy in early but buying shares before the company is floated is not without risk and the investment is not liquid - it could prove hard to sell the shares and get the funds out before a flotation because there is no exit mechanism.

One broker not involved in private placings said: "It is definitely not a win-win situation. It is quite a speculative business. Very few of the companies are likely to perform as spectacularly as Riverdeep. For every placing that goes on to be a top performer there will be a number which never get there and the private client will lose money. People who invest don't always do well and investors in private companies take a big risk."

Brokers reject a perception that they can pick the companies that will float well and give their best clients the opportunity to get into these shares early. Another perception is that some brokers can add to the normal pre-flotation hype to ensure that a share will rise well in early trading, or, that the private placing share price can be set low to ensure that the early investors will get a good return.

One broker maintained that they were entitled to look after clients who were prepared to be active investors in a number of shares and who could lose as well as win in the market.

Advisers have to tread a fine line between raising funds for corporate clients through their corporate finance divisions and making investments for clients through their private client divisions. There is a risk for a broker in putting clients into investments that do not work out. Angry clients can take their business elsewhere. One broker suggested that to operate private placing, brokers need clients with substantial assets who have a "mature attitude to losses". Clients are asked to sign a document stating that they accept they could lose all of their investment.

Who are the private clients who get these opportunities? They are usually already wealthy individuals with funds to invest who want to invest actively to expand their wealth.

Some may have made their money through floating a family-owned or private company through the stockbrokers involved and may have registered as a private client in order to be made aware of new investment opportunities. Others may be high-earning professionals who are building investment portfolios.

But they will generally already have substantial investment portfolios which are being managed by the stockbroker. Often the client and the stockbroker will agree to keep, say, 80 to 90 per cent of the portfolio in quoted investments and earmark the balance for speculative or high risk investments. These are the funds that could be used to take up shares in private placings.

To become a private client an individual must register with the stockbroker or private banking unit. They will be required to complete standard forms which are used to ensure compliance with legislation such as the antimoney-laundering laws. The stockbroker/bank must know the clients they are dealing for - they are required to obtain evidence of identity - and be confident that their funds come from legitimate sources.

Private placings can provide lucrative investment opportunities by allowing investors to get in early and reap the benefit of successful flotations. The problem is that the opportunity is only available to a limited number of investors, though brokers are reporting big increases in their private client numbers as wealth in the economy rises.