Keep an eye on the private secondary market as reductions are pushed.

Everyone enjoys a good deal, especially in a buyer's market. Growth-stage companies and startup unicorns are currently trading at a discount ranging from 20% to 50% off their main market valuation for comparable shares in the private secondary market for Indian technology firms. Growth-stage company investment bankers and secondary market specialists attribute this to market corrections as well as funds of the 2015–16 generation trying to sell their illiquid assets.

A steep haircut in the Over-The-Counter (OTC) secondary market for private companies has been observed for unicorn startups like Oyo, Vedantu, and companies that are about to go public, like boAt Lifestyle and API Holdings, owner of Pharmeasy, while there was hardly any discount between the primary market and secondary market value of comparable shares in 2021. 

While boAt stated that it is corporate policy to refrain from commenting on its past, current, or future share price, other companies had not yet replied to inquiries as of the time the story was published. There have been more inquiries about selling due to the decline in startup valuations in industries including edtech, fintech, and consumer brands that underwent a hyper-funding cycle last year. According to Skanda Jayaraman, CEO of Qapita Marketplace, which provides liquidity solutions for startup stakeholders via a digital marketplace, talks have been challenging to conclude since buyers continue to be in price-discovery mode. 

The broad view

 "The key difference from 2021 is that supply didn't keep up with demand, so finding customers was a challenge. Because it's difficult to determine an asset's "fair price," there's a surplus of supply on the market now, and demand has declined drastically (to peak COVID time/demonetization levels). Even publicly traded (but unlisted) companies with freely traded shares have seen their value for investors and their profits for middlemen erode, according to Skanda.

 The issue with offering large discounts in private enterprises is that founders would object (and are thus unlikely to permit) steep discounts to establish a long-term pricing standard for others, delaying the completion of trades and deals. The length of a startup's runway affects market inquiries and discounts, with a shorter runway strongly correlated to significant price reductions on secondary shares. 

Fund houses drive transactions

 It is normal for funds to evaluate exits after the fourth year of a fund spread over a seven plus two-year lifecycle, according to Sumir Verma, Founder and Managing Director at investment banking firm Merisis Advisors, which focuses on the technology and consumer sector. "Funds of 2015-16 vintage are already thinking of their Multiple on Invested Capital (MoIC) and Distribution to Paid-In Capital.

 He continues by saying that as funds seek liquidity, general partner (GP) led secondaries are also increasing, with GPs choosing a subset of their portfolio firms to put together a basket on offer to secondary funds with the pledge to manage them till the eventual departure. According to him, "these portfolio companies are often ones that are not likely to go for a liquidity event in a short period of time," either because they are already profitable and don't need cash or because of market conditions.

 Such deals could have higher discounts than a direct secondary, but funds are okay as liquidity is equally important and these portfolio companies are typically already returning more than the targeted hurdle rate, according to Sumir. "The proceeds from such sales are then returned to the existing Limited Partners (LP - investor in the fund). Earlier this year, Merisis provided Fosun with an exit in two of its portfolio companies—Ixigo and Kissht—in the $30–$50 million transaction range. 

Better days ahead?

Over the next six months, it's expected that a small number of deals will close on the secondary market for private tech companies, most of which are intended to allow vintage funds and AIFs an exit. In FY22, the private market in India saw transactions worth close to $70 billion, of which about a third were secondary deals, such as Private Equity, Venture Capital, Family office, and HNI exits. The markets will stabilize eventually because of the significant financial commitments and fresh funding made to India.