Wait and watch in the private secondary market amid pressure for discounts
Everyone loves a bargain, especially when it comes to a buyer’s market.
The private secondary market for Indian tech startups is currently in price discovery mode, with growth-stage startups and startup unicorns trading at a discount ranging from 20% to 50% in some cases, their valuation on the primary market for comparable shares.
Investment bankers and secondary market experts for growth-stage companies associate this with the market correction as well as vintage 2015-16 funds seeking to exit illiquid assets.
While 2021 has seen virtually no discount between the primary market value and the secondary market value of comparable stocks, unicorn startups such as, and IPO-related companies such as and API Holdings, owner of have seen a straight haircut in Over-the-counter (OTC) secondary market for private companies.
Some starter unicorns are trading at above-average discounts in the OTC secondary market.
Your story contacted these companies to obtain their comments on the evolution of the value of the shares. Whereas boAt said that as a policy, the company does not comment on its past, present and future stock price.others had not yet responded to questions until the time of the article’s publication.
“The valuation of technology companies has fallen since theIPO. This, followed by declining liquidity and attrition, impacted the secondaries of deemed public companies. We are seeing an average reduction of 25-30% on secondary for these companies,” said Ranjit Jha, Managing Director-CEO of investment advisory firm Rurash Financials. Your story.
The decline in valuation of startups in sectors such as edtech, fintech and consumer brands, which went through a cycle of hyperfunding last yearled to an increase in sales enquiries.
However, negotiations have been difficult to conclude, as buyers continue to be in price discovery mode, says Skanda Jayaraman, CEO of Qapita Marketplacewhich facilitates liquidity solutions for startup players via a digital marketplace.
The big picture
“The big contrast to 2021 is that demand has exceeded supply, allocation to buyers was the problem to solve. Today there is a glut of supply in the market and demand has fallen sharply (up to peak period/COVID demonetization levels) because the “right price” of an asset is not easy to establish,” explains Skanda.
Skanda adds that even public (but unlisted) companies, whose shares are freely traded, have seen their value eroded for investors and their margins for intermediaries. “The problem with offering deep discounts in private companies is that founders would dislike (and therefore are unlikely to allow) deep discounts to establish a long-term price benchmark for others, thus blocking the closing transactions/agreements.”
The solution for the platform has been to work on offers selectively, which are more likely to be approved by the company.
Indian Private Secondary Market Rebates
Market inquiries and discounts also depend on the runway a startup has, with a shorter runway being directly proportional to steep discounts on the secondary stock price.
Transactions managed by fund houses
“The funds of the 2015-16 vintage are already thinking about their Multiple on Invested Capital (MoIC) and Distribution to Paid-In Capital. It’s natural for funds to assess exits after the fourth year of a fund spanning a seven-plus-two-year life cycle,” says Sumir Verma, founder and managing director of investment bank Merisis Advisors, which focuses on technology and the consumer sector.
He adds that secondaries led by the General Partner (GP – in charge of fund portfolio management) are also on the rise as funds seek liquidity. GPs select a few of their portfolio companies to create a basket offered to secondary funds with the promise of managing them until eventual exit.
“Typically, these holding companies are the ones that are not likely to opt for a liquidity event in a short period of time, either because they are already profitable and don’t need the cash, or because market conditions,” he said.
“The proceeds of these sales are then returned to the existing limited partners (LP – investor in the fund). Such transactions could have higher discounts than a direct secondary, but the funds are fine because liquidity is just as important and these Portfolio companies usually already return more than the minimum target rate,” says Sumir.
Merisis gave a release to Fosun in two of its portfolio companies – Ixigo and Kissht – in the $30-50 million deal tranche earlier this year.
Better times ahead?
The secondary market for private tech companies is likely to see only select deals closed over the next six months, designed primarily to give vintage funds and AIFs an exit.
According According to Qapita’s estimates, almost $70 billion in private market deals took place in India in FY22, of which almost a third came from secondary deals including private equity, capital -risk, the family office and HNI outings.
In the current fiscal year, the overall deal pie is expected to shrink to around $40 billion due to a sharp correction due to valuation and trading volume. The company did not comment on the estimated secondary trade contribution.
“Decision-making on both sides has stalled and will likely be a temporary phenomenon, given the amount of capital committed by private equity funds in this geography,” says Skanda of Qapita Marketplace.
He adds: “The best managed companies and the best quality companies will be the first to exit the block and attract capital, and gradually this should trickle down to the ecosystem as a whole.”
This is supported by Ranjit Jha of Rurash Financials, who says secondaries demand is expected to be weak over the next six months.
With large capital allocations and new funds committed in India, it is only a matter of time for the markets to return to equilibrium.