S-E Asian unicorn secondaries sought amid IPO drought

Singapore

FANCY a slice of super-app player Grab, but can't get into one of its blockbuster funding rounds? More investors are gaining access to South-east Asian unicorns via the growing market for their secondary shares, which is in turn supported by a lack of unicorn exits, industry players told The Business Times.

Secondary shares (broadly called "secondaries") refer to shares of a company held by existing investors, management or staff. By selling part or all of their stake, they get to cash out of their positions, while the company itself does not receive any proceeds.

Given the maturing cohort of unicorns in South-east Asia, investors are snapping up junior classes of shares held by founders and early backers - generally ranging from seed stage to Series B - as well as the vested options and shares of early employees.

These deals usually require the unicorn's approval and sometimes that of key investors. They can happen during a unicorn's funding round or even between rounds, brokered by industry middlemen.

Until a unicorn exits via an IPO (initial public offering) or trade sale, secondary sales are another way of realising gains, said Lachmi-Niwas Sadani, founder and chief executive of private equity firm Lensbridge Capital.

"Exit delays, or strategic decisions to stay private longer, together with overall growth in primary venture investments, are all leading to growing activity in the secondary market as early investors and employees seek liquidity," said Mr Sadani, whose firm is active in the secondary market.

Venture firms with an "ageing portfolio" in particular are a growing source of secondary shares, as they face pressure from their backers to generate returns, said a spokesman for private investment platform Fundnel, which also facilitates secondaries deals.

Another major source of secondaries is employees. Sometimes, the unicorns themselves may help employees sell their shares to other investors, to reward and retain talent, said Joel Shen, a partner at law firm DWF and venture principal at Vickers Venture Partners.

"In South-east Asia, there have only been a few exits - Lazada, which was bought by Alibaba and Garena, which was listed as Sea. The other exits have been mid-cap, US$20 million or US$30 million exits. Employees also have mortgages and children's school fees to pay, so giving them a bit of liquidity is not a bad idea," he said.

With the supply in place, demand for unicorn secondaries is flowing in. Said Mr Sadani: "Anecdotally, there is growing demand from family offices, High Net Worth Individuals (HNWIs) and investment firms which use secondaries as a way to manage their overall entry price on transactions."

Sometimes, Venture Capital (VC) firms also buy secondaries from fellow investors to increase their exposure in a portfolio company, said Amy Zhao, who handles investor and general partner relations at Openspace Ventures. She said unicorn secondaries usually change hands within a tight circle of industry connections. And that circle is getting wider.

"For the popular companies, there's a lot of inbound interest, asking whether we want to sell our shares... There's family offices that may be interested in a particular company, and may have missed a (primary) round, their cheque size is just not big enough to be in the round or there's no allocation for external investors," she said.

Jean Claude Donato, managing director of tech investment research firm Nikaia, said: "When (family offices and HNWIs) see these new online businesses growing fast and successful tech startups such as Grab or Gojek raising money, they want a small exposure to this new asset class - often to test the waters or due to the fear of missing out."

Specialised funds are also showing interest in South-east Asian unicorn secondaries.

For instance, Indies Capital Partners, an Indonesia-focused alternative asset manager, has raised US$71 million for a fund that purchases secondaries in high-growth, pre-IPO tech firms in South-east Asia.

The fund is backed by HNWIs, family offices and financial institutions from Asia. It has done nine deals to date, with ticket sizes between US$2 million and US$10 million.

Harold Ong, managing director of Indies Capital, said: "While the tech ecosystem in South-east Asia is still young, there are some companies starting to mature as they are seven to 10 years since founding."

Private banks are another source of demand for unicorn secondaries in the region, acting on behalf of their clients.The Bank of Singapore (BOS), for one, purchases secondaries on a "selective basis", only where the issuer approves the sale and shareholder records are properly updated, said Lim Li Li, its head of global investors and family offices.

"These unicorns are expected to stay private longer which will lead to more liquidity in the secondary market... Some companies even help investors to facilitate secondary share sales, as this would place less pressure on the companies to go public," she said.

Interestingly, global investors like US and European pension funds are also tapping on secondaries to get a taste of the South-east Asian growth story, especially those that are not invested in this region's venture funds, Mr Donato of Nikaia.

Where will the unicorn secondaries market go from here? Until South-east Asia sees a wave of exits, like in the US and China, it will gain momentum, said Mr Ong.

The growth is likely to track the primary market for unicorn venture investments, said the Fundnel spokesman. "Alternative foods, green technology and companies that are already making a profit are taking the lead," she said.

Of course, with the opacity of the market, uncertainty still prevails. For instance, Mr Donato notes that the market sentiment can swing quickly after sagas such as WeWork's botched IPO.

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