• VC continuation vehicles yet to catch on in India, Southeast Asia despite liquidity needs
• Large valuation discounts are a sticking point, with existing LPs reluctant to sign off
• Secondary buyers prefer proven GPs, mature assets, relatively diversified portfolios

Mohan Kumar went solo in 2019, after over a decade in India with Norwest Venture Partners, via a USD 300m continuation vehicle (CV) backed by HarbourVest Partners. The capital was used to acquire five minority equity positions from Norwest and make follow-on investments. Two years later, Kumar added USD 100m to the Fund I pot, bringing in three new LPs and capital for three more deals.

Rategain Travel Technologies [NSE:RATEGAIN], an investment from the second batch, went public in late 2021. Kumar expects three of the original five companies to join it on the Indian bourse within 24 months, while a fourth is being primed for a trade sale. Two of them, ElasticRun and Zenoti, raised follow-on rounds at USD 1.5bn valuations post-spinout, but both transactions pre-date the mid-2022 slowdown.

Kumar’s endeavour, now five years old and called Avataar Venture Partners, continues to invest in software start-ups and digital transformation. A second fund closed in June on USD 350m. Kumar wasn’t the first to combine a spinout with a CV, but since he completed the trick, no other Indian VC firm has even replicated the CV part. It is not, Kumar maintains, an easy path to follow.

“First, secondary investors want scaled assets at a good price, which means a 30%-40% discount to NAV [net asset value]. Second, they want at least three companies. Third, they want a GP that knows the portfolio well. It narrows so quickly, the chance of finding the right combination is very slim,” he said.

VC secondaries are an acquired taste, necessitating different risk appetites and underwriting skills. Only two firms globally have sizeable funds dedicated to the space: StepStone Group and Industry Ventures. Neither is especially active in Asia, with Industry Ventures limiting Asian exposure in its funds – including LP positions in funds, single-asset and multi-asset CVs, and directly held stakes in companies – to 10%.

Advisors point to numerous other potential buyers, from Lexington Partners and Goldman Sachs to an assortment of fund-of-funds and small secondary specialists in the US and Asia. Hans Swildens, founder and CEO of Industry Ventures, estimates that 20 out of a buyer universe of approximately 50 might look at an Asia-focused venture CV. Based on disclosed transactions, few are willing to act.

“It all depends on the companies, countries, and sectors. Even in Southeast Asia, there are different geopolitical issues, currencies, regulations, and capital markets,” Swildens added. “It seems that every two to five years, a different part of Asia has issues related to the venture market and liquidity.”

Mixed messages

China most obviously fits this profile: the NAV discount required to assuage an incoming investor’s concerns around geopolitical, regulatory, and exit uncertainty is so large that many LPs in the target fund would refuse to sign off on it. Capital is looking for alternative destinations, yet India and Southeast Asia – the third and fourth largest VC markets in the region – aren’t turning interest into execution.

Multiple Southeast Asia-based GPs have explored CVs in the past 12 months but to no avail, according to multiple industry sources. Speaking to AVCJ in April, Shane Chesson, co-founder of Openspace Ventures, suggested secondary investors could have closed deals last year and enjoyed subsequent valuation upticks had they not been so aggressive on pricing. The investors see things differently.

“Valuations have generally followed where the US markets have trended in the past, but the market hasn’t quite delivered. There is often a meaningful gap between fair market valuations and reported valuations. There hasn’t been much exit activity, and the companies that did go public haven’t performed well post-IPO.,” Martin Yung, a principal at HarbourVest, said of Southeast Asia.

“As a secondary buyer, regardless of region, we are always looking for potential paths to exit for the underlying portfolio companies. When we cannot see one, it’s hard to justify investing.”

Global secondary transaction volume reached a record USD 69bn in the first half of 2024, helped by a surge in single-asset CVs, according to Greenhill. VC and growth assets accounted for 15% of volume, with pricing holding steady at a 24% discount to NAV. However, Greenhill noted the quality bias – its numbers are based on transactions that close, and few sellers are willing to discounts above 50%.

The advisory firm identified the makings of a revival as valuations bottomed out, though buyers remain selective. While late-stage venture and growth funds were pricing at 15%-35% discounts to NAV as IPOs return in the US, early-stage venture funds were stuck in 40%-60% territory, with the heaviest discounts applied to portfolio companies marked at 2021 through mid-2022 valuations.

Some industry participants see signs of this stabilisation extending into Southeast Asia. Amit Anand, a founding partner at Jungle Ventures contrasted the “bottom-fishing” of 2023 with his recent conversations with secondary investors and advisors, which have focused on “paying a fair price for top assets and questions about how we, as a GP, are looking to have more time with these assets.”

Jungle invests in Southeast Asia and India. Asked how the two markets stack up in terms of secondaries, Anand noted India’s head start in building companies of scale and capital markets that can handle start-up listings. Certainly, the difference in liquidity profile is stark. India is on track to better the eight-year trailing average for PE-backed IPO volume and deal count; activity in Southeast Asia is negligible.

There is a bullishness around India VC secondaries most visible in the appetite for direct stakes. Several specialists have emerged in the country, including Kenro Capital, which was established earlier this year by Peak XV Partners alumnus Piyush Gupta to target deals in India and Southeast Asia. They are not the only ones looking to capitalise on the need for liquidity among managers with funds nearing expiry.

“Up until 18 months ago, only players like us were doing secondary direct deals in India. Now traditional growth investors are getting involved, as well as investors that were historically focused on China. Competition and prices have increased dramatically,” said Paul Robine, founder and CEO of TR Capital.

TR Capital is now more focused on multi-asset CVs, which are not pursued by generalist PE players. Even there, pricing is getting heady. One secondary advisor has fielded enquiries from Indian managers looking to price deals at 10% discounts to NAV. Kumar of Avataar has also noted a shift in the dialogue.

“In 2019, the question asked during due diligence was how you get exits in India. The IPO market wasn’t as exuberant as today and the industry depended on trade sales to large foreign technology companies, which are unpredictable,” he said. “Fast forward four years, IPOs have become a high-level exit path, and the question is no longer how you will exit, but when.”

Selling points

There are, however, certain characteristics of the original Avataar transaction that facilitated its execution – and they are evident to varying degrees in certain other venture CVs around the region.

First, it featured a single seller. The portfolio was carved out from Norwest, which facilitated negotiation because the manager didn’t have to placate multiple LPs. Several pre-2017 VC spinouts in India had similar structures. The likes of KPCB and Sherpalo Ventures and Canaan Partners exited the country by selling portfolios of assets to their local teams, with secondary investors picking up the LP interests.

Meanwhile, in early 2021, LGT Capital Partners and Axiom Asia supported a USD 400m CV comprising 14 Southeast Asia, India, and China-based assets drawn from funds in the portfolio of Temasek Holdings-owned Vertex Holdings. The funds were old enough that they predated Vertex entities raising third-party capital, so Temasek Holdings was the sole LP.

Second, the Avataar transaction involved a relatively diversified portfolio. There is no consensus view on this issue. According to Robine, TR Capital “cherry picks as much as [it] can” when constructing CVs. Given the choice between a portfolio of 20 companies at a 50% discount and three companies at a 20% discount, he would always choose the latter, reasoning that a full exit can be more easily achieved.

Others prefer diversification because the dispersion of outcomes for VC assets can be so broad. Jason Sambanju, a partner and CEO at secondaries specialist Foundation Private Equity, noted that Grab [NASDAQ:GRAB] and GoTo [IDX:GOTO] used to be touted as focus assets in proposed Southeast Asian CVs. With both stocks trading well below their IPO prices, those CVs might now be loss-making unless pricing was aggressive on the way in.

Secondary investors also look to minimize their downside risk by targeting relatively mature VC portfolios where there is a reasonable expectation of exit within the typical lifespan of a CV – five years, plus two one-year extensions. Even then, there will likely be few key return drivers.

“It is VC exposure but mainly growth assets, so we can underwrite with some visibility as to realisation,” said Brooke Zhou, a partner at LGT. “Maybe there are two or three assets that we think, based on our underwriting, will cover the entire purchase price. That makes the portfolio; the rest is optionality,”

Zhou declined to comment on specific deals, but one involving LGT is instructive. In early 2021, it backed a HarbourVest-led USD 600m restructuring of one of IDG Capital’s renminbi-denominated funds. A stake in retailer Shein accounted for 30%-40% of NAV at the time, according to a source close to the situation. The company’s valuation then rose more than 12x to 64bn last year, and its NAV share was nearly 100%.

GIC went one step further in 2022. Its primary motivation for backing a multi-asset CV raised by Kejora Capital – one of few deals of this nature in Southeast Asia – is said to have been getting exposure to a single company: Indonesian delivery start-up Sicepat, which was valued at USD 744m a year earlier.

An acceptance that one asset may generate the bulk of a multi-asset CV’s return should not be conflated with an appetite for single-asset CVs. These are notoriously difficult to execute. Australia’s Blackbird Ventures tried and failed with workplace collaboration platform Canva in 2022, which was then valued at USD 40bn. “Secondary buyers aren’t comfortable with 40x revenue multiples,” a second advisor said.

VC managers must also overcome the scepticism of existing LPs. “When we’ve spoken to VC managers about single-asset CVs, we’ve said, ‘Why not just sell the asset outright, because that’s what your LPs are going to ask you, and our price is unlikely to be close to your NAV,’” said Foundation’s Sambanju. “Any manager considering a single-asset CV must have an answer to that.”

Structured solutions

Even with multi-asset CVs, LPs are invariably asked to take delayed distributions as well as discounts. Incoming investors often propose preferred equity structures that entitle them to 100% of distributions until the portfolio achieves a near 2x return, after which the upside is shared. The question is how much structuring the selling LPs can take, noted Alex Lee, a managing partner at Axiom.

According to the second advisor, one venture CV that fell over in the past 18 months received bids of USD 0.25 on the dollar – or a 75% discount to NAV – with a 2x preferred equity structure. It reflects extreme sensitivity towards valuation and risk from buyers that must often pitch for space in global secondary funds that for the most part focus on North America, the advisor added.

There is also a greater emphasis on alignment of interest. Robine noted that TR Capital includes provisions in deals that allow it to reduce carried interest payments to the manager if distributions to paid-in (DPI) hurdles are not cleared. Other requirements increasingly regarded as standard – such as the manager committing carried interest generated by the asset transfer to the CV – are being emboldened as well.

“In this environment, we need as much alignment as we can get,” said Yung of HarbourVest. “Globally, GPs are accepting this reality. It’s not just the carried interest rollover but also a cash commitment on top, and where appropriate, we may use other alignment tools like having the latest fund co-invest alongside the continuation vehicle at the same valuation.”

If a CV isn’t possible, Ion Pacific positions itself as an alternative source of liquidity in the vein of global NAV lenders Dawson and 17Capital. The firm’s solutions involve the reassignment of economic interests in companies and funds and the creation of new structures, but essentially, it lends against pools of assets to enable distributions. For example, it might finance an asset transfer from Fund II to Fund III.

Ion Pacific is distinct in its willingness to lend against venture assets that have no cash flow, which results in loan-to-value (LTV) ratios and return profiles starkly different to those for buyouts, according to Michael Joseph, the firm’s co-CEO. Southeast Asia is part of a global fund mandate, and he claims to be seeing a lot more VC deal flow as managers run out of time and run out of options.

“In year seven of the fund, they don’t like my price. In year eight, they come back, tell me how well the assets are doing, and ask if it changes where I stand on price. I say no. By year 9.5-10, there’s been no new liquidity, no one else is interested, and suddenly my price doesn’t look so bad,” said Joseph.

“Every name in Southeast Asia venture has tried to do a GP-led secondary at some point over the past 18 months. Most haven’t generated meaningful DPI, and they aren’t raising new funds. Over the next 12-18 months, the smart ones will do what it takes to create DPI and leapfrog the pack.”

Venture capital firms that spoke to AVCJ do not buy into this narrative. Rather, the issue is pricing. According to Openspace’s Chesson, secondary investors agreed on deals only to back away in response to market volatility and return with lower bids. LPs refused to “take a discount on top of a discount.”

A second manager described it as a global cyclical phenomenon instead of a Southeast Asian problem, adding that recent bumper primary funding rounds in the US suggest the cycle has turned.

An inflection point?

Some industry participants also point to a structural overlay. Krishna Skandakumar, a US-based partner at law firm Goodwin Proctor, observed that, three years ago, private equity CVs involved blue-chip managers and trophy assets. Now coverage spans the middle market with far greater variation in pricing. He expects VC secondaries – still perceived as trades of direct stakes – to evolve as well.

The trickle of enquiries Goodwin once received from venture players has become a torrent, and more could still be done in terms of industry education. Meanwhile, Industry Ventures and StepStone’s fundraising efforts suggest investors are responding to this demand. The same could happen in Asia as investors look beyond the current diet of control assets in developed markets.

“The notion that you will be able to do all control positions in mature Asian companies is a fallacy. They don’t exist in the same way they exist in other geographies,” said Skandakumar. “When I talk to secondary buyers about India, they say it’s all growth and late-stage VC and it doesn’t fit their parameters There has to be a shift in the way people think.”

Others are blunter in their appraisals of the market and what would constitute a sea change in VC secondaries. For Foundation’s Sambanju – specifically referring to Southeast Asia – managers conducting full marked-to-market revaluations of their portfolios would be a positive first step.

“You want to have that conversation with your LPs now, not when you are trying to sell assets to yourself in a CV – it looks really bad,” he said. “Maybe they do some outright sales, generate some DPI, and at the end of that, if they haven’t finished selling, then they do a CV and the discount is 20%-30% rather than 50%-60%.”