The secondary market is experiencing a remarkable resurgence, with pre-IPO valuations surging past public equities and fueling investor interest. As the first half of 2024 unfolds, key trends are emerging that highlight the strategic moves investors are making in the private equity landscape. Understanding these trends is crucial for investors seeking to navigate the shifting dynamics of pre-IPO valuations, secondary trade volumes, and the rise of Special Purpose Vehicles (SPVs).
Pre-IPO Valuations Surge Past Public Equities
Source: Caplight
One of the most striking trends in the first half of 2024 is the dramatic recovery and outperformance of pre-IPO valuations compared to public equities. Following a strong rally that began in mid-2023, pre-IPO prices have continued to rise, up 56% year-over-year through the second quarter of 2024. This recovery has largely been driven by increasing investor confidence in high-growth companies that have not yet gone public, particularly those that exhibit strong profitability and scalability.
Investors are prioritizing private valuations over public market comparable. This is a notable shift, as the market traditionally treated private valuations as discounted compared to their public counterparts. Now, investors are favouring private companies, especially those positioned for rapid growth, over publicly listed firms in the same sectors. Noteworthy comparisons include:
Databricks versus Snowflake (SNOW)
Databricks, a leader in data and AI, is outperforming Snowflake, a major player in cloud data warehousing, in terms of private market valuation and growth prospects.
Source: Caplight
Stripe versus Adyen
Stripe, a leading online payments company, is now trading at a premium over Adyen due to its impressive EBITDA growth, making it a favorite among investors in the fintech sector.
Source: Caplight
The trend of private companies outperforming their public counterparts reflects the market’s growing focus on scalability, profitability, and long-term growth potential. Investors are willing to pay premiums for private companies that exhibit these characteristics, even in sectors where public companies are well-established.
Secondary Market Boom: Volume Surges in 2024
The secondary market has seen a significant uptick in activity through the first half of 2024, with closed transaction volumes outpacing 2023 levels. Year-to-date secondary trade volumes have increased by approximately 50% compared to the same period last year, accumulating US$1.4 billion in closed trades over the past 12 months.
This surge in secondary transactions can be attributed to several factors. First, as more private companies opt to stay private for longer, secondary markets have become a key avenue for liquidity. Investors, especially institutional ones, are taking advantage of these opportunities to gain exposure to high-growth companies before they go public.
Moreover, company-sponsored secondaries have gained traction, as private firms look to manage their cap tables and provide liquidity to early investors and employees. This has made secondary markets even more appealing to investors who want to secure a stake in promising private companies without waiting for an IPO or direct primary issuance.
The Rise of SPVs in the Direct Secondary Market
One of the more interesting developments in the secondary market in 2024 is the growing dominance of SPVs in direct secondary transactions. SPVs now account for 43% of trade volume in the secondary market, a sharp increase from 13% in the first quarter of 2023. This trend reflects a shift in how investors are structuring their secondary market investments.
Based on data from Caplight, the closed trade volume and deal sizes continue to increase and we continue to see a significant uptick in closed SPV trade volumes and continued demand or supply via SPVs.
Source: Caplight
SPVs are used to pool capital from multiple investors to acquire shares of private companies, often when there are restrictions on direct share transfers. This allows investors to navigate transfer restrictions and gain access to private companies that might otherwise be difficult to invest in. The willingness of investors to pay SPV fees underscores their appetite for exposure to high-growth private companies, even if it means navigating additional administrative and financial hurdles.
Investor Focus: Growth and Profitability Drive Valuations
As the market for private equity continues to evolve, investors are placing a premium on companies with strong growth trajectories and improving profitability. The secondary market boom is being driven by demand for companies that are not only growing rapidly but also showing clear signs of becoming profitable at scale.
This focus on profitability is a departure from the growth-at-all-costs mentality that dominated much of the private equity landscape in the past decade. Investors are now scrutinizing the financial health of private companies more closely, looking for those with sustainable business models and clear paths to profitability. This has led to a bifurcation in the market, where companies with strong financial fundamentals are attracting higher valuations, while those without a clear path to profitability are being left behind.
For example, Stripe’s valuation premium over Adyen is largely driven by its EBITDA growth and its ability to scale its business profitably, while Adyen, though a dominant player in the fintech space, is not showing the same level of growth.
Conclusion: Navigating the Evolving Secondary Market
The first half of 2024 has brought significant changes to the secondary market, with pre-IPO valuations surging, secondary trade volumes increasing, and SPVs taking a larger share of the market. For investors, this presents both opportunities and challenges.
On the one hand, the boom in pre-IPO valuations and the rise of SPVs provide new avenues for investing in high-growth private companies. On the other hand, the focus on profitability means that investors must be more discerning in their investments, carefully evaluating the financial health and long-term growth prospects of the companies they invest in.
As the private equity landscape continues to evolve, staying informed about these trends will be key to successfully navigating the market. Investors who can capitalize on the opportunities in the secondary market, while maintaining a disciplined approach to evaluating growth and profitability, will be well-positioned to succeed in this dynamic environment.