85% of secondary deals priced similarly to primary rounds
In an analysis of 273 concurrent primary and secondary transactions, 85% of secondary transactions were priced similarly to primary rounds, demonstrating that secondary sales are not universally discounted. However, in 15% of cases where a discount was observed, the average markdown was 20%, with most transactions showing a discount in a narrow range around the average.
Limited impact of CPS and liquidation preferences on pricing
The capital structure of new-age companies often includes CPS, which grants investors rights such as liquidation preferences and downside protection. While these rights suggest that secondary transactions could be priced lower, the study reveals that investors do not always assign significant value to them, due to various reasons discussed in the Study.
Pandemic resilience: stable pricing during COVID-19
During the pandemic (2020-2021), the average discount in secondary transactions was 18%, slightly lower than the 24% seen in other periods. This reflects the high demand for start-up investments during the Covid period, with demand-supply stabilizing post Covid.
Size and buyer profile do not affect discounting
Discounts were consistent across companies of various valuation sizes, with smaller companies seeing marginally lower discounts. Additionally, the size of the transaction or the stake being sold did not significantly impact the discount. Whether the buyer in a secondary transaction was the same as in the primary round did not materially affect the discount either.
Conclusion: redefining secondary transaction pricing
The Empirical analysis of secondary transaction discounts by EY sheds light on the pricing dynamics in Indian start-ups. With most secondary sales priced similarly to primary rounds, investors now have a reliable benchmark for navigating liquidity events and evaluating secondary transactions. The study provides critical insights into the role of CPS, liquidation preferences, and broader market conditions in shaping pricing behavior in the secondary market.