LPs watch Tiger’s secondary as opportunity to hammer VCs on valuations

If bids come in at a steep discount, some LPs are ready to use that data point to question other VCs invested in the same assets about their valuations and why they are not writing them down.

A large VC secondaries deal that is just getting organized has the potential to spark a wave of LP consternation and GP re-assessment on valuations to the point of even impacting current fundraising processes, several LP and secondaries sources told Buyouts.

Tiger Global’s efforts to sell stakes in investments across its portfolio has some limited partners watching closely for how the deal prices. If bids come in at a steep discount, some LPs are ready to use that data point to question other VCs invested in the same assets about their valuations and why they are not writing them down. Each asset in the sale will likely have several other VC investors alongside Tiger, some up into the double digits, according to an LP with a corporate pension.

The situation could get especially tricky for VCs raising new funds who could be forced to spend time and money justifying their valuations to potential new investors questioning their marks, sources said.

“This could be quite problematic for a lot of VC groups,” said the corporate pension LP. “That’s going to be especially true for groups that are raising that are also in those same assets.”

A spokesperson for Tiger Global declined to comment. The firm is working with Evercore on the sale, which sources described as potentially a strip sale of stakes in numerous assets that would be bundled into a portfolio, sources said. The size is not clear, but a sale likely wouldn’t happen if buyers demand too steep of a discount, according to a person with knowledge of the situation.

Secondaries pricing on VC funds fell in a range of 63 to 68 percent of net asset value in the first quarter, according to a quarterly secondaries volume report from PJT Park Hill.

Yet, even if a sale doesn’t happen, the price is what is being scrutinized by LPs.

The issue goes to the heart of a point of contention in the industry today – that GPs (both VC and private equity) are holding values at what some limited partners consider artificially high levels.

Private equity and venture’s performance resilience in the face of volatile public markets would seem to be a positive, yet it’s also created imbalances in many LP portfolios. As the value of an institution’s investment fund drops with public markets, illiquid private investments take longer to move, either up or down. And recently, PE valuations have not experienced commensurate write-downs to public markets, with Q1 marks generally coming in around flat to slightly positive to the fourth quarter, sources said in prior interviews.

With this steady performance, private investments swell as a percentage of the total investment fund, putting many systems at or beyond their policy allocation caps. This imbalance has forced LPs to make tough decisions about whether to pull back their allocation pacing, boost their target (reducing focus on other asset classes) or even sell down their portfolio on the secondaries market.

And it’s also created frustration among LPs, who believe GPs are reluctant to take appropriate write-downs on their investments, especially if they’re fundraising. GPs have pushed back that their companies are fundamentally strong with wide open growth paths and don’t deserve write-downs.

Tiger’s secondaries sale “will cause a lot of funds to spend time and money supporting their valuations,” said a secondaries buyer.

“A lot of venture companies are genuinely over-valued, and people are sort of dying to find a poster child to slap on the wall and prove these funds need to write their assets down. A multibillion-dollar venture deal at a massive discount fits that bill perfectly,” the buyer said.

The sale could be a “window” into how tough the next few years will be for late-stage VC, according to a second LP at a state pension. “It will put some pressure on other late-stage VCs to get real with their marks.”

The secondaries sale is not considered an “orderly” market transaction like a funding round, and so is not looked on as a primary driver of valuing an asset. As well, the price on Tiger’s sale would likely be on the portfolio of assets as a whole, and the discount tied to that, so it would provide less of a view on individual assets, sources said.

But, as a portfolio, a steep discount will spark questions from LPs, who will then want to dig into the individual companies to learn more about why they’re holding their marks, sources said.

“If you generally just take LP portfolios that are pricing in VC, you can use that as a starting proxy, and then groups can dig into the individual assets and create their own valuations of those as well,” the private pension LP said.

Still, a secondaries sale of an alternate security would likely not be the triggering event for an asset revaluation, according to Curtis Farrow, managing director and practice leader in private equity and venture capital services at Centri Business Consulting.

“The Tiger sale is a data point, but it’s not the be all, end all,” Farrow said. “If they’ve done a capital raise recently, that can be arguably a better, more defensible answer for arriving at a proper valuation. But absent activity in the company, you can look to those guideline transactions in secondaries as a data point. But you have to dive into and account for potential differences in the sub-industry they’re in, how far along the company is in its life cycle, geographic and product/service diversity, and other factors that impact the company’s growth and risks.

“I think there’s a lot of nuance in it, but it could be telling of directionally where things might be moving,” Farrow said.

Even in the absence of an actual re-valuation, the sale, and others like it expected to come on line over the next few months, are likely to create a lot of noise around valuations. LPs will be watching and GPs should be as well.