Pricing unicorn secondaries a smoke-and-mirrors game

Singapore

OPACITY is the name of the game in the private markets, and perhaps more so when it comes to unicorn secondaries. There is no standard price discovery mechanism for these deals, so buyers and sellers rely on publicly-disclosed valuations as a gauge.

Secondaries of super-app player Grab, for instance, have reportedly been sold at discounts of between 10 and 30 per cent to the firm's recent US$14 billion valuation, The Business Times understands.

Unicorn secondaries often trade at a discount to the unicorn's latest valuation, rather than a premium, because they belong to more junior classes of shares. Such shares, typically issued during Series B or earlier rounds, carry fewer rights and hence are riskier. For instance, a Series E investor's shares may carry a liquidation preference of 2X - meaning that in a trade sale or liquidation, such investors get back two times their investment value, before earlier investors are paid.

Discounts on the secondaries of startups perceived as being riskier can even go up to 50 per cent of the firm's latest valuation, market players told BT. In such instances, buyers have to think twice on whether to bite - after all, such a fire sale could be a sign of distress.

Needless to say, the unicorn secondaries market can be a world of smoke and mirrors. "It's difficult to access for most investors as demands often outstrips supply, and also they present higher risk due to limited public information, price transparency and liquidity," said Jean Claude Donato, managing director of tech investment research firm Nikaia.

Still, savvy buyers can rely on benchmarks beyond valuations to clinch a reasonable deal, said a spokesman for private investment platform Fundnel. For instance, buyers may use the company's share price at an upcoming funding round as a benchmark, gleaned from the company, its shareholders or from market opinion. Finding a comparable listed firm from which to derive a reasonable price is another option.

In any case, with the opaque market, players like the Bank of Singapore tread cautiously. It ensures it has access to company information and timely updates on developments when taking part in such deals, said Lim Li Li, its head of global investors and family offices. "As South-east Asia is still a developing market, the secondary market is not regulated. Pricing of private shares is not transparent, and company information is not readily available. It is a game for institutional players who can do due diligence," she said.

READ MORE: S-E Asian unicorn secondaries sought amid IPO drought