The Carta liquidity report: Q3 2022

Author: Kevin Dowd

Published date: 9 November 2022

Q3 saw a decline in secondary liquidity across sectors. Our Q3 liquidity report includes analysis of trends in seller participation, transaction volume by stage and sector, and more.

Methodology

Carta helps more than 32,000 primarily venture-backed companies and 2,100,000 security holders manage equity. Our liquidity report examines trends in secondary liquidity to promote transparency and to help investors, companies, and employees make informed decisions.

The data presented in this liquidity report includes snapshots as of September 30, 2022, of tender offers and other secondary trades conducted by Carta. With the exception of the list of law firms enabling liquidity programs, data used in this study is aggregated and anonymized.

Transactions are reported based on their settlement date. Historical data may change in future studies due to administrative lags for transactions to be recorded in Carta, or to reflect calculation updates and corrections. Industry groupings are based on self-reported industry information, which Carta completed and normalized for the purpose of this study.

Which companies are choosing liquidity?

Liquidity programs by stage

Among Carta cap table companies, late-stage companies have historically been the most active in terms of the number of secondary transactions they conduct. These more mature companies are more likely to have long-term shareholders who are hungry for liquidity. While companies at Series E or later continue to lead in number of transactions for the trailing 12 months, representing 25% of all transactions, this is a drop from 31% for the one-year period ending June 30, 2022.

Over the last several quarters, secondary activity shifted toward early-stage companies. So far this year, companies executing a secondary deal with Carta have been more likely to be coming off a Series B round than any other stage. This movement toward the earlier stages accelerated in Q3, with more transactions involving Series A companies than Series E+.

Liquidity transactions by valuation

Over the past 12 months, companies valued at $1B or higher accounted for 52% of all secondary transactions on Carta. Looking at just Q3 2022, however, we find additional evidence of a shift toward earlier-stage companies transacting at lower valuations. More than a quarter of all secondary transactions in the past three months came from companies valued at $250M or less.

Companies valued at $5B or more had far and away the largest median transaction size over the past 12 months, at $85M. Among companies valued at less than $250M, the median amount of the company that changed hands was 4.4% in transactions over the last 12 months.

Which industries are using liquidity?

Secondary transactions remain most popular in the SaaS sector, which was home to nearly half of all liquidity programs and total sellers over the trailing 12 months as of September 30, 2022.

Overall participation by industry segment in terms of number of secondaries transacted is largely unchanged from the one-year period ending June 30, 2022.

How much value is changing hands?

In line with broader market activity, the secondary market trended toward smaller transactions in Q3. As of June 30, the median amount offered the past one-year period was $35M. As of September 30, it was $25M. This subsequently led to a reduction in actual money transacted over the trailing 12 months from $24M in Q2 to $19M in Q3.

Subscription rates

The median subscription rate dipped slightly in Q3: Half of secondary transactions on Carta saw sellers meet 92% or more of the demand from buyers—a decline of 5% from Q2. The subscription rate is still higher than any quarter prior to the start of 2022.

Who is choosing to sell equity?

Although Q2 2022 saw both the median participation rate and the median number of sellers in a secondary transaction soar to new highs, those figures reversed in Q3, with the median seller count falling to its lowest point in the past two years. One cause could be that Q3 brought an increase in the percentage of secondary deals that involved all or mostly investors.

In most tender offers, the majority of sellers are employees. The percentage of tenders in which all sellers are employees has increased significantly year over year—and the percentage in which all sellers are outside investors has declined.

Author: Kevin Dowd