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The opportunity of market downturn for our direct secondary strategy

Increasing demand for liquidity

Delayed liquidity windows will automatically generate a growing need from founders to unlock the value of their achievements and allows early investors to achieve returns in the needed timeframe.

Healthy change of mindset in companies

Following a period of cash abundance, management teams come back to fundamentals: control the burn rate, conserve cash, extend runway, shift from growth to efficiency as an effort to avoid or postpone the needs to raise new capital and thus decrease the risk for a downward pricing round.

A needed adjustment in valuations

Public markets provide the best basis for recalibrating private valuations and thus will automatically impact private market valuations even if it can take 6+ months before we see what impact the public market downturn has had on venture funding.

All the above are positive forces for our direct secondary strategy. At Secondary Capital (SC), we avoided Pre-IPO type situations as most of them were priced based on “fancy” public multiples. We focused on proprietary Founder led secondaries in high growth companies, cash self-sufficient, Tier 1 backed, with discount to previous rounds / listed peers and an exit timeframe from 18 to 36 months.

Value Evolution of Tech Companies Listed In 2021(1)

The value evolution of tech companies that went public in 2021 is clear evidence that the stage of our investment positioning still allows for return generation even in downward cycles while Pre-IPOs and public markets have lost on average 30 to 50%. We strongly believe that our entry point, well ahead of potential IPO events while bearing lower risk than early-stage investments, provides the most resilient risk-return profile.

(1) Data observed in 13 companies with the largest IPOs in 2021. Data collected as of May 2022. Value at each time series is indexed to the earlier stage value more than 48 months prior to IPO, typically company valuation at Series C

(2) Implied value of IPO is based on offering price at the IPO

Sources: Refinitiv Database, News articles


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