Whilst also true for many in the US, the prospect of an IPO exit in emerging markets (particularly outside India) is often a far-flung dream. 

Many investors across Next Wave markets will turn to secondary market participants and private equity to exit their holdings. Secondaries refer to transactions where existing shareholders of a company sell their stakes to new investors. Such deals allow investors to cash out of investments.

Next Wave VC ecosystems are generally very young. Many regions did not receive international institutional-grade VC capital until 2015-2021. As such, maturity in the secondary ecosystem has not been needed until now, when the earliest investors need to start returning capital. 

Venture Capital to Private Equity Exits

PE will become an increasingly important exit route for emerging markets VCs. Like PE, VCs will learn that assets can change hands. 

Most VC-backed companies have primarily considered two main exit avenues: selling to a strategic buyer or an IPO. Whilst markets like India saw IPOs comprising a larger portion of exit volume in 2023, these were still in “traditional sectors”, and opportunities remained muted for tech that has seen high private market valuations.

IPOs typically dominate the headlines but represent a minority of private equity exits worldwide. Mergermarket data suggests exits to PE fund (sponsor-to-sponsor deals) made up just 8% of total exits for VC-funded companies between 2006 and 2010, that figure has surged to a 24% for the years 2021 to 2023. In India, the percentage of companies exiting via sponsor-to-sponsor deals (secondary buyouts) has grown from 19% in 2019 to 28% in 2023.

What does this mean for minority secondary investors in VC funds and VC-backed companies?

As PE firms emerge as a major exit route for startups in emerging markets, these PE firms are likely to leverage the buyers market (given capital scarcity beyond early-stage VC) to offer lower multiples than may have been initially underwritten by a VC that assumed an IPO outcome or strategic sale. This will likely put a pin in the hopes of many companies achieving a unicorn exit. 

The sweet spot for exit valuation expectations is likely between $250 million and $1 billion, where the largest pool of potential buyers is positioned. The number at the lowest end of this range will be considered a large exit in more frontier emerging markets. 

Setting aside many other complexities, secondary buyers of VC-backed assets should bake in an exit to PE into their scenario analysis. The more modest exit valuation associated with this exit method means entry price and valuation discipline are crucial.