Why Is The Venture Capital Secondary Market Growing So Much?
Do you know why the venture capital secondary market involvement is growing so much? There are good reasons behind this. Keep reading to learn what it is and why it’s happening.
A direct secondary is what happens when an investor’s ownership is bought or sold, specifically for companies backed by private equity or venture capital. It’s unique from the related limited partner secondary market, as the direct secondary market is typically characterized by the transfer of any ownership interest directly held in a company instead of a transfer of any fund interest, a fund, or an indirect ownership stake. What the direct secondary market means is that there are options for investors and management to sell any stock they have, even when the whole company isn’t getting sold. Investment stakes might be sold in a single business or even across a broader portfolio of businesses.
Selling private company shares through the secondary market has gotten more prevalent as many of the timelines that lead up to liquidity events have gotten longer over the past decade. This trend has been exacerbated in recent years by many institutional investors and their decisions to sell off non-core investments in the search for short-term liquidity. Also, some senior executives have been looking to monetize the stake they have in their companies ahead of the time that the business is actually mature enough to officially go public.
These secondary transactions can be essential sources of liquidity in numerous circumstances. One such case is when a venture capital fund is at the end of its fund life. Another scenario is when a venture fund doesn’t have enough reserve capital in order to fully support their current portfolio. Secondary transactions can also be a means of offering liquidity to early employees and founders who have had extensions to their exit timelines. Hedge funds sometimes use secondary transactions to seek liquidity they can use for their side-pocket funds.
Venture capitalists are sitting on tops of virtual mountains of potential dry powder, possibly with more than a trillion dollars waiting for somewhere to go. Given this, they are under a lot of growing pressure to distribute their returns. Many venture capital funds that have aging portfolio companies are looking at secondary transactions of a way to give investors the chance to realize value and even get capital back, but without having to make full exits from the companies they own or have stakes in.
Recently, some of Uber’s earliest investors got partial liquidity because of a secondary deal. The exiting investors wound up getting nearly $8 billion out of the deal. The secondary sale even helped in gauging investor sentiment, helping price for the eventual IPO. Spotify investors also did a few secondary transactions ahead of the company’s direct listing, again smoothing out liquidity needs and offering price discovery for a smoother transition into the public market.
Now that you’ve read this article, you have a better understanding of what the venture capital secondary market is and why it’s growing so rapidly.