The secondary market, and more specifically the secondary market in the private equity capital segment of high-tech companies, is the globally fastest-growing investment channel in recent years. As the start-up market continues to grow and mature, so do the direct secondary markets. The increasing need for solutions that allow the transfer of private equity capital from hand to hand is the result of several driving factors.
The first factor is the number of goods relevant to this market. The amount and the aggregate value of companies defined as Unicorns (a privately owned company with a value of over 1 billion dollars) are growing at an unprecedented rate. Between the years 2018 and 2022, the number of unicorns grew from 260 to 986, an addition of 726 companies. The aggregate market value of these companies grew from around 900 billion dollars in 2018 to approx. 3,200 billion dollars in 2022, a growth of about 255%, as can be seen in the diagram below:
On top of that, the time cycles from the establishment of a company to the exit are very long. The median age of technology companies at the time of their issuance jumped threefold between the years 1999 and 2021, from a median age of 4 years to a median age of 12 years, and even more so the value at the time of the issuance rose:
This being so, there is a growing need for measures that allow shareholders, especially entrepreneurs and employees, to “meet with the money” at an earlier stage in the company’s life, without having to wait for the company’s issuance or sale to a third party. Nowadays, some of the companies and/or platforms active in the market are trying to organize secondary rounds themselves with private investors or venture capital funds to allow employees to exercise their shares. These transactions give investors the opportunity to realize value and return capital without a full exit.
According to IQ-EQ & Moonfare, The growth of the secondary market in the last 15 years has accelerated and reached an all-time high in 2019 with a total transaction volume of approximately $88 billion, a substantial increase from a transaction volume of approximately $37 billion three years earlier. In 2021, the total volume of transactions reached a new record of $132 billion, 50% higher than the previous record of 2019 and 120% higher than the previous year.
Source: Greenhill Cogent and Park Hill (2021 data from Jefferies)
Referring to the results of the first half of 2022, the Jefferies analysts claim that the strong transaction momentum that occurred in the fourth quarter of 2021 continued into the first half of 2022. These analysts estimate that during the first half of 2022 no sales were made out of distress, as is usually the case during periods of Economic uncertainty, however, limited partners in private equity funds demonstrated a strong desire to close deals when many of them found themselves with the need to sell part of their holdings in private equity in order to correct overallocation situations. The forecast for 2022 is for continued extensive activity in the secondary market, with a projected total transaction volume of approximately 120 billion dollars in the entire year of 2022. The valuations of the companies are expected to decrease on average compared to the first half of the year, which according to the analysts will lead to price decreases in future transactions.
Referring to the prices at which transactions were made, the analysts of the Jefferies company say that they dropped similarly to the sharp drops that occurred during the period in the prices of shares in the public markets. Jefferies believes that price declines are expected to moderate during the second half of the year.
As a supplementary index to the stock prices of the unicorn companies in the world, the Elephant website investigates the sales prices requested by the potential share sellers on theelephant.io platform, and this is in relation to the share prices in the latest fundraising rounds.
Since fundraising rounds are held once in very long periods (sometimes years), and since during periods of falling markets there is difficulty in measuring the secondary market decline, companies avoid holding a fundraising round at a falling price, even at the cost of postponing the round, a look at the prices demanded by shareholders in the secondary market can give a complementary index of where the prices are in the private market.
Over the years, the accepted standard has been that the price of the Common stock, which is mostly held by the company’s employees and its initial entrepreneurs, is about 30%-50% lower than the price of the Preferred stock in the last fundraiser. This is exactly what we observed on the theelephant.io platform – the 2020 data show that employees who offered their shares on the site were quoted at an asking price of about 35% less than the share price in the last round.
In the analysis below, it can be clearly seen how, after this long-term trend, in which secondary transactions were carried out at a discount as described in relation to the last recruitment price, in 2021 an unprecedented phenomenon occurred in which most of the supply for secondary transactions was at demand prices higher than the last recruitment prices in companies.
As mentioned, the phenomenon was unprecedented and quite amazing – it should be remembered that the purchase of a Common share in the secondary market is inherently inferior to participating in a fundraising round, and this is due to priority in liquidation, and additional rights such as access to information and more, which differentiate between the types of shares. This reversal, in which a premium on Common shares was required instead of a discount, came from massive excess demand as well as from a continuous surge in prices which resulted in the fundraising that took place a quarter or two ago looking “old” at the time, and therefore its price no longer reflected it.
However, as the crisis in the capital market continues, with an emphasis on the high-tech sector, it is possible to see a relaxation in this indicator, when in the second half of 2022 they return exactly to the standards known from the past, of an average discount of about 30%:
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 IQ-EQ&Moonfare – Roundtable: The rise of the private equity secondaries market – Key trends, July 2021
 Jefferies, 1H 2022 Global Secondary Market Review, July 2022