India’s sold on VC secondaries, but SEA isn’t buying it

Most people know what secondhand markets are (think thrift shops) and how they promote a circular economy.

But what about the secondary market for venture capital, which involves VCs reselling their shares in private companies to other investors?

A healthy secondary market enables VCs to recover capital and reinvest, while share buyers are often betting on the company to go public to get higher returns – similar to reselling a vintage item for profit.

For startups, it can “help founders and early employees achieve some form of liquidity, and also clean up the cap table to streamline shareholders management,” says RedDoorz founder and CEO Amit Saberwal. The Singapore-based hospitality firm has conducted secondary sales.

He added that selling secondary shares with primary ones in a new funding round could bridge the valuation gap with the incoming investor.

In Southeast Asia, the secondary market has been slow to gain momentum, with only a few tech firms going public despite steep discounts on shares. In contrast, India’s booming IPO market is fueling growth in its secondary market.

For the region to reach the same level as India, it needs a more mature primary share market and higher liquidity in its stock exchanges, industry insiders tell Tech in Asia. When companies go public, secondary investors seek assurance that there will be sufficient domestic demand to sell shares at a higher value.

A tough sell in SEA …

Several major VC firms in Southeast Asia are selling shares from their 2018 and 2019 vintage portfolios at 30% to 70% off from their original valuations, according to an industry source.

Some are looking to recover capital even from their 2020 and 2021 vintage funds, where investments were made at a premium as a result of Covid-induced demand. VC funding in the region peaked at US$34.7 billion in 2021.

Compared to other regions, Southeast Asia’s secondaries market is lagging because of lower returns and a difficult exit environment, according to a family fund manager.

“The temptation to raise a bigger fund rather than focus on exits is always a challenge for VCs in this ecosystem,” says the source, who requested anonymity.

… but hot in India

Can SEA follow suit?