Evening Brief – 05.15.23

As we discussed in our Evening Brief on Friday, using the secondary market as a source of liquidity for investors in the private market is gaining momentum and seems like the ideal location for an exit as fewer companies are going public.

Private companies may seek liquidity for many reasons, including to pay out dividends, finance new investments in existing portfolio companies, or simply get rid of businesses they don’t think will recover quickly enough.

Today, it was reported that Tiger Global Management has chosen to dump hundreds of millions of dollars’ worth of private startups onto the secondary market after a rough 2022.

The long-only fund sank 67% last year, securing its worst annual performance ever, as Tiger Global fell 56%. Reports do not say whether the firm wants to sell these companies because redemptions are increasing, but it is clear liquidity is needed.

Last year, Tiger marked down the value of its private company investments across all its venture-capital funds by 33%, erasing about $23 billion in value, The Wall Street Journal recently reported.

When the Federal Reserve fixed interest rates at the zero lower bound for almost a decade, purchasing startups and then selling them on public markets was an easy business strategy for Tiger Global and many of its competitors.

However, fewer companies are going public due to a decline in M&A activity and a severe block on IPOs and SPACs brought on by rapidly rising interest rates, suggesting Tiger, and possibly other companies, is holding a bag of startups that it purchased at exorbitant values.

While the Fed’s crusade to fight inflation remains in play, turmoil in capital markets will persist, which spells bad news for these companies’ ability to offload startups at high valuations. Additionally, the climate of increased interest rates lowers valuations and makes it more difficult for cash-burning businesses to raise new funds.