Case 093Exits and secondariesCore

A secondary buyer wants 3% of Pravahik Payments from an early fund. The last round was Rs 4,000 crore post-money a year ago. The buyer targets a 25% IRR and expects an exit at Rs 7,000 crore in four years with 15% more dilution. What can it pay, and what discount to the last round is that?

The situation

Pravahik Payments runs payment gateways and settlement software for online merchants. An early-stage fund that backed it at seed holds 3% and is near the end of its life; its LPs want cash. A secondaries fund has offered to buy the whole 3% stake.

Pravahik's last round, a year ago, was at a Rs 4,000 crore post-money valuation. The secondaries buyer's model assumes an exit, by sale or listing, at Rs 7,000 crore in four years, with later rounds and new options diluting the stake by 15% before then. It wants a 25% IRR. Ignore fees and taxes, and assume the stake has the same rights as the last round's shares.

Your task

Work out the most the buyer can pay for the 3%, the discount to the last-round mark, and what that implies about the company's value today.

Quick check

Roughly what can the buyer pay for the 3% stake?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The buyer can pay about Rs 73 crore, a 39% discount to the Rs 120 crore last-round mark. The 3% is diluted to 2.55% and is worth Rs 178.5 crore at a Rs 7,000 crore exit. A 25% IRR over four years needs 2.44x, so today's price is Rs 178.5 crore divided by 2.44. That values the whole company at about Rs 2,437 crore, against Rs 4,000 crore at the last round.

Step 1Why does a secondary buyer not simply pay the last-round price?

If you buy a flat from someone who needs cash quickly, you work out what you will sell it for later and what return you need, and pay whatever that leaves, whatever the seller paid. A secondary buyer prices the same way: from its expected exit, back through dilution and time at its target return, so the last round is a reference point, not the price. The seller here is a fund that has to return cash to its LPs, which is why discounts on early-stage stakes are common.

Step 2What is the price, step by step?

Start at the exit. Later rounds dilute 3% by 15%, to 2.55%. 2.55% of Rs 7,000 crore is Rs 178.5 crore of proceeds in year four. A 25% IRR over four years means multiplying money by 1.25 to the fourth power, 2.4414. So today's price is Rs 178.5 crore divided by 2.4414, Rs 73.1 crore. At the last round the same 3% was marked at Rs 120 crore, so the buyer's price is a 39.1% discount.

The relationship
P=0.03×(1−0.15)×7,0001.254=178.52.4414=73.1P = \frac{0.03 \times (1 - 0.15) \times 7{,}000}{1.25^4} = \frac{178.5}{2.4414} = 73.1
0.03 x (1 - 0.15)the stake after 15% further dilution, 2.55%
7,000expected exit value, Rs crore
1.25^4the multiple a 25% IRR needs over four years
What it says in wordsThe price today is the stake's exit proceeds shrunk back by four years at the buyer's required return.
Work backwards from the exit: the buyer's price is set by its return, not the last roundExit value, year 4Rs 7,000 crbuyer's expectationBuyer's stake then2.55%3% less 15% dilutionProceeds at exitRs 178.5 cr2.55% x 7,000Price todayRs 73.1 cr/ 1.25^4 = / 2.44The same 3% stake, Rs croreLast-round markRs 120 cr (3% x 4,000)Secondary priceRs 73.1 cr39% discountImplied value of the whole company today: Rs 73.1 crore / 3% = Rs 2,437 crore
Working back from a Rs 7,000 crore exit, the diluted 2.55% stake is worth Rs 178.5 crore in year four and Rs 73.1 crore today at 25% a year, a 39% discount to the Rs 120 crore last-round mark.
Step 3How sensitive is the price to the buyer's assumptions?

Every input moves it. If the exit is Rs 5,000 crore instead of Rs 7,000 crore, the price falls to Rs 52.2 crore, a 56% discount; if the exit takes five years, it falls to Rs 58.5 crore. Forgetting dilution would overpay: without it the price would be Rs 86.0 crore. The seller should argue about the exit value and timing, because those are where the buyer's caution lives. A 25% target is not a law either: a buyer with cheaper capital or more conviction could pay more.

CasePrice, Rs croreDiscount to Rs 120 crore
Base: Rs 7,000 crore exit in 4 years, 15% dilution73.139%
Exit at Rs 5,000 crore52.256%
Exit in 5 years58.551%
Ignoring dilution (wrong)86.028%
A lower or later exit deepens the discount sharply, while ignoring dilution overpays by about Rs 13 crore, so the buyer's exit assumptions are what the seller should challenge.
Step 4Is a 39% discount unreasonable?

Not by itself. The buyer is implicitly valuing Pravahik at about Rs 2,437 crore today, and the gap to Rs 4,000 crore reflects time, risk and the buyer's required return, not a view that the company is failing. The buyer still expects a 2.44x money multiple. The seller should compare this bid with what holding would give its LPs and with other bids, and ask whether the company has news since the last round. The limit is that the last round was priced with preferred rights and a growth story a year old, so it is a soft anchor; a stale mark is not a market price.

Where candidates lose it

Candidates discount 3% of Rs 7,000 crore and forget the 15% dilution, paying about Rs 86 crore. The buyer will own 2.55% at exit, not 3%, and its price has to reflect that.

The second miss is anchoring on the Rs 120 crore last-round mark and calling a 39% discount a distress sale. A buyer wanting 25% a year from a four-year hold needs about that discount even if it believes the company is doing well.

What the interviewer asks next

  • The stake is common stock rather than preferred. How would the buyer adjust its price?
  • The seller has a right of first refusal from Pravahik's lead investor. How does that affect the process?
  • What IRR is the buyer earning if it pays Rs 90 crore?
  • Why do secondary buyers often pay smaller discounts for later-stage stakes?

Company names and figures are illustrative.