Selling Group of Warrants?

Assume you're sitting on ~20 in the money warrants that allow you to purchase equity in private companies that are growing anywhere from 1.3x - 2.2x YoY. Maybe avgs out to ~1.7x.

Not all of the company's have sufficient TAM for traditional venture buyers (or growth) and are probably not something your value investor grandpa wants. 

Rough math let's assume these are worth $3M - $5m. Therefore check size is probably too small for some of the growth-y PE investors?

Let's assume even if someone paid above market for them, IRR would still work out to 20% - 25% for them.

Looking for guidance around who to approach for this kind of transaction. Maybe something a small iBank could help with? Or a small family office? Not really too sure. Would love for some of the LMM ibanker guys to chime in! How could you sell these at once? Who would be a good buyer? Etc.

Or maybe it's better to sell the lowest conviction bets off slowly. I'm not really sure, but I think you could get a lot more if selling to an institutional size seller because they generally are OK with higher prices?

 

Can you bundle them first? In other words, even if you don't legally merge them, can you sell them with the appearance of a single, larger company that might hit the size band to get interest from LMM PE?

Otherwise I'm sure you'd get interest from the handful of ecommerce rollups that are buying anything they can get their hands on. They're usually trying to buy cheap, but they might be willing to pay up for a platform that has already been professionalized to some degree.

I'm not sure what the investment banking market looks like for deals of this size. I'm sure there are ecomm specialists but I don't know what their minimum fees are.

"Son, life is hard. But it's harder if you're stupid." - my dad
 

Wait a sec, you're just talking about selling the warrants.

Man, that's a good question. I don't know how you'd go about just selling the warrants. Seems like it would be a perfect fit for a small family office but it'll be a slog sourcing someone who knows how to value what you have in a way that will work for you.

"Son, life is hard. But it's harder if you're stupid." - my dad
 
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Somewhat up my alley albeit never done warrants only. I'll take a high level stab and follow up with some more color later. Challenges like this make the job interesting :)

1. Bundle them as a whole and sell as a portfolio as suggested in another post. Question is to who. Venture friendly family office most likely as (a) am guessing likely too early for secondaries and (b) I would think VC would want some semblance of control like a board seat of some kind.

2. Bundle by vertical / sector. Opens up the buyer universe a bit. Corporate VC might be an avenue here but I wager most will want a slug of equity and board seats to go along as well

3. Sell individual positions. Most likely buyers that come to mind are existing investors in each of those companies who want a bigger piece or just some more optionality. 

4. Is converting and selling equity an option? Less optionality but I think more palatable to a broader group of potential buyers, especially if the converted ownership gets to something meaningful, particularly with a board seat. 

The overarching challenge will be agreeing on value. Would be your view vs. buyers, have been in tedious af negotiations around the right vol and other underlying pricing assumptions.

 

Thank you, appreciate this. Replying in-line...

1. Bundle them as a whole and sell as a portfolio as suggested in another post. Question is to who. Venture friendly family office most likely as (a) am guessing likely too early for secondaries and (b) I would think VC would want some semblance of control like a board seat of some kind.

Some venture/growth focused investors are OK with no seat, but not all of these companies are growing fast enough to be interesting for venture or have TAM that is relatively small and won't produce a venture size outcome.

2. Bundle by vertical / sector. Opens up the buyer universe a bit. Corporate VC might be an avenue here but I wager most will want a slug of equity and board seats to go along as well.

Yeah the board seat thing is a problem. These warrants are unrestricted/can be traded and have no expiration but I can't get board seats with them.

3. Sell individual positions. Most likely buyers that come to mind are existing investors in each of those companies who want a bigger piece or just some more optionality. 

Yeah this is probably the route. Some of these companies have existing investors, others do not. I could find a good fit for each and sell individually...just seems like a PITA.

4. Is converting and selling equity an option? Less optionality but I think more palatable to a broader group of potential buyers, especially if the converted ownership gets to something meaningful, particularly with a board seat. 

Yes but I don't see the benefit of converting. There's no restrictions or expiration date meaning we have all the benefits of equity with none of the downside exposure. For ex one is the right to purchase up to 10% of the company - fully diluted - at the greater of a 4x TTM EBITDA (unadjusted lol) or $7.5M valuation. If you couple that with no exp + restrictions....a lot better than owning the equity in most cases.

The overarching challenge will be agreeing on value. Would be your view vs. buyers, have been in tedious af negotiations around the right vol and other underlying pricing assumptions.

Exactly. That being said, I don't care too much about valuation. For us, these are inexpensive positions and derived from a portfolio that is more of a liquidity play than anything. Not too worried if we only get 3x instead of 3.5x...would rather not risk the market blow up etc.

 

Maybe this is a confusing question or maybe I'm just dumb. For the warrants to be in the money, I'm assuming you are just using the latest post-money valuation of each company to determine their "in the moneyness". If that's the case, I don't really see how you could determine what value to sell illiquid, private market warrants for? I guess the question is, what happens if the next financing is a down round and the warrants aren't in the money anymore? It's hard enough to get a secondary done for a lot of private companies that aren't showing gangbusters growth; there's always the issue of lack of liquidity, "why are they selling now if they believe in the story", etc. I would imagine it's 5x harder for an instrument like private warrants..

 

Dissecting. 

Maybe this is a confusing question or maybe I'm just dumb. For the warrants to be in the money, I'm assuming you are just using the latest post-money valuation of each company to determine their "in the moneyness".

Depends on the company. Some are going from breakeven to suddenly EBITDA positive and you can build a pretty solid argument for w/e valuation based on that. Others fall in the VC camp. 

If that's the case, I don't really see how you could determine what value to sell illiquid, private market warrants for? I guess the question is, what happens if the next financing is a down round and the warrants aren't in the money anymore? It's hard enough to get a secondary done for a lot of private companies that aren't showing gangbusters growth; there's always the issue of lack of liquidity, "why are they selling now if they believe in the story", etc. I would imagine it's 5x harder for an instrument like private warrants..

In the past I've sold secondaries by making it clear we are not long-term partners. We will do what we say we do on entry, but I have no interest in holding illiquid stock for 10 years. VCs are OK with this and don't really question it. To your point, a down round would indeed be a pretty hard blow to the valuation but all of these are not VC-funded or VC-appropriate companies. In most cases we're getting in at a very conservative valuation anyways.

 

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