Startups on a clear path to profitability are seeing a surge in secondary transactions as strengthening private market valuations entice investors to take some money off the table before they go public, multiple investment advisors said.
According to multiple investment bankers, private investors are waiting to sell at least $600 million to $1 billion worth of stake in the tech ecosystem alone. Private investors are also showing a greater willingness to exit in pre-IPO (initial public offering) deals, as there is a cleaner exit opportunity.
At the same time, incoming investors who are buying stakes at the pre-IPO stage are also benefiting as the scrips of several startups have bulged in value after listing day.
For instance, secondary trades ahead of the IPO of e-commerce company FirstCry were struck at a $2.8 billion valuation last December, where founder Supam Maheshwari, apart from SoftBank, sold shares. The company later listed at a nearly flat valuation of $2.9 billion on 13 August, but thereafter saw its market cap shoot up to about $4.1 billion last Friday, 16 August.
Likewise, the IPO of electric scooter maker Ola Electric valued it at $4 billion, about 25% discount to the $5.4-billion valuation in its last private funding round in September 2023. However, the company’s market cap surged to $6.99 billion on 16 August, a day after it launched a new line of motorcycles.
“There is definitely an unprecedented boom in secondary transactions,” said Kashyap Chanchani, managing partner at investment banking firm The RainMaker Group, adding that he’s seeing an arbitrage in the private market and public market multiples for the first time in his career. “Public market multiples are materially higher than private market multiples,” he added.
The recent changes in the Union Budget is also poised to further sweeten the deal for investors. From 1 April 2024, long term capital gains tax for both unlisted and listed shares have been fixed at 12.5%, sweetening exits in pre-IPO rounds. Earlier, the subsequent 10% tax rate on listed shares compared to the 20% tax on unlisted shares made early exits less attractive.
“A reduced rate of tax may result in more secondary transactions going forward, due to the higher post-tax rate of return,” said Rahul Charkha, partner at Economic Laws Practice.
“There is a stronger resolve among people to get secondary transactions done sooner rather than later,” one of the investment bankers cited above said, asking to remain anonymous. “There is one less reason to wait for an IPO when the company is in a pretty late stage and the investors are ready to exit.”
Secondaries take off
To be sure, the boost in secondary transactions is already visible, with operators preferring to clean their captables before IPOs.
“It is better for the stock performance if a proportion of shareholders realise returns before the IPO, so there is less pressure on the stock resulting in upward rallies,” explained the investment banker quoted earlier.
“This is one reason why companies try to conduct pre-IPO rounds with secondary components so newer investors can join the captable who are less likely to sell their shares immediately after the IPO, further stabilising the stock price,” the banker added.
According to a July report by DC Advisory, there has been a surge in secondary and buyout deals involving profitable companies since the beginning of 2023. Such transactions accounted for approximately 50% of the total deal value between January 2023 and June 2024, with this figure climbing to 62% for deals exceeding $50 million.
Omnichannel beauty and personal care products platform Purplle Group raised a $120 million investment from an arm of Abu Dhabi Investment Authority (ADIA) in July. The transaction also included a secondary component where Blume Ventures offloaded a part of its stake.
While the company posted a loss of ₹230 crore in FY23, Purplle in a statement in July announced that it is operationally profitable. The company also said that it is currently spending on growing its online platform faster than the industry, while scaling offline stores and improving profitability.
Earlier, in June, eyewear brand Lenskart, which has seen a series of fundings over the past year, also closed its latest round of $200 million from Temasek and Fidelity through a secondary share sale.
The company, which reduced its losses from ₹102 crore in FY22 to ₹64 crore in FY23, had earlier raised $500 million from Abu Dhabi Investment Authority last March, where Kedaara Capital, Chiratae Ventures and TR Capital, among others, offloaded shares.
According to data sourced from VCC Edge, other secondary transactions in the tech ecosystem include Nexus India Capital, TR Capital and Montane Ventures selling shares in a $100 million round in Sedemac Mechatronics Pvt. Ltd. in May, Bessemer Venture Partners and 360 One Asset made a partial exit from Nephrocare Health Services Pvt. Ltd in the same month during $102 million funding from Quadria Capital.
Saas firm Dezerv and financial services company Kogta are among other companies that gave exits to early investors in recent funding rounds in June and May, respectively.
For The RainMaker Group’s Chanchani, however, the recent IPO successes and the shift in market dynamics, with public markets becoming overvalued, is a larger motivation rather than a tax parity. “The tax cuts are an added feel-good factor…,” he said.
Quicker exits
While investors with huge shareholding might still take an IPO route, more secondaries open up channels for quicker exits with lesser risks, Charkha added.
This comes as general partners in funds are also increasingly looking to find options to realise gains sooner through secondary transactions, merger and acquisitions, and buy-outs to boost returns for their limited partners, securing continued commitment for future funds.
“Investors seeking to reduce risk and realise gains sooner, including venture capital firms, angel investors, and early-stage institutional investors, are likely to be active in secondary transactions,” Kinjal Champaneria, Partner, Solomon & Co said. He added that startups with substantial early-stage investors or those nearing IPOs may experience more secondary transactions.
In fact, identifying a gap in the ecosystem, a number of fund managers and partners have ventured out of their companies to launch new late-stage secondary-only funds.
“There is an explosion of secondary-only funds in the ecosystem; more senior partners and fund managers are venturing out to start their own funds to invest in secondary deals,” said an investor of a large early-stage venture capital firm.
