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A Guide to Secondary Sales
A Guide to Secondary Sales
Jun 27, 2024
Halle Kaplan-Allen & Gavin Freeman, Sydecar Max Harris, Co-founder and CEO of Ticker Markets
Venture capital is an illiquid asset class. Investments in private companies, whether directly or indirectly (through funds), are locked up to some extent until the company goes public or gets acquired. Secondaries have always been and remain a strong mechanism for investors to achieve some level of liquidity before a traditional exit opportunity arises. However, as the exit market (and therefore liquidity) has dried up over the last few years, the volume of secondary transactions has grown dramatically. The robustness and types of secondary opportunities for investors have similarly expanded, yielding new and exciting opportunities for buyers and sellers.
What is a Secondary Transaction?
In the private markets, a secondary sale is any sale of ownership in a startup (typically common or preferred stock) where the seller is anyone other than the company itself. For instance, an investor may purchase Series Seed stock and then resell it to another investor several years down the line prior to the company going public or getting acquired (known as “exiting”).
A Brief History
Around the turn of the century, private markets grew exponentially with new capital and investors flooding in. Allocators started investing more, and as the market ebbed and flowed, investors needed liquidity. They turned to secondary sales for this. However, secondary sales had a stigma, leading to a scarcity of buyers, hesitancy from sellers, and tight regulations.
The 2008 financial crisis significantly impacted secondary markets. As liquidity dried up, LPs were forced to hold positions longer than expected, spurring a rise in secondary buyers and transactions. After a period of stability, the market saw a resurgence in 2020-2022, driven by high valuations and substantial committed capital, which led to large, late-stage investments in overvalued companies. Rising interest rates and declining market sentiment caused valuations to drop, closing the IPO market and hindering M&A activity. Consequently, a new wave of secondary vehicles, funds, and marketplaces has emerged to address these liquidity challenges.
Types of Secondary Transactions
Direct Secondaries
The most common form of secondaries occurs via "direct" sales, where the underlying asset is equity in a company. Given the restrictions on shareholders and transaction volume that large private companies are subject to, secondary transactions can be difficult for these companies to accommodate. To bypass these hurdles, investors can use SPVs to buy company equity and then trade shares of those SPVs. While this strategy can unlock liquidity opportunities, such transactions can also be complex and difficult to manage.
Fund Secondaries
Sometimes, shares of private companies are sold as part of a larger fund. When these fund positions are traded, they are called fund secondaries. Fund secondaries make up an entire ecosystem on their own. The exact nature and structure of a fund secondary can take on many forms. Three main mechanisms are the most popular:
LP-Led Secondaries
If an investor becomes a Limited Partner in a fund, they can also access the secondary market. As private funds often extend beyond their planned divestment date, investors might face liquidity issues. LPs looking for full or partial exits can sell their positions to other fund investors, outside investors, fund-of-funds, or specialized secondary funds. These dedicated secondary funds are becoming increasingly common, providing more options for LPs to achieve liquidity.
GP-Led Secondaries
When a fund is nearing the end of its intended lifecycle, GPs can introduce liquidity by selling the fund’s ownership of select companies in a secondary transaction. This strategy is similar to that of a direct secondary. Often, these positions are bought by private equity firms or secondary funds. This group also encompasses strip sales.
Continuation Vehicles
If a fund has reached the end of its intended lifecycle, but the portfolio is still not ready for liquidation, GPs can turn to continuation vehicles. These involve effectively rolling the current portfolio into a new fund or vehicle, which can include adding new LPs. Oftentimes, LPs of the original fund can use this to sell their stakes for liquidity, and secondary funds can utilize this technique to gain exposure to late-stage portfolios. Such vehicles have become very popular over the past year, and are expected to be a core focus of the secondary market’s trajectory in the near future.
Benefits of Secondaries
The primary function of a secondary transaction is to create liquidity for the initial purchaser. This is especially relevant in VC, where investments are typically “illiquid,” meaning that investors won’t receive a return for five, ten, or more years. Secondaries allow VCs to return funds to their LPs without having to wait for a portfolio company to exit.
Secondary sales can also allow VCs to recycle capital back into a fund. Instead of returning funds to LPs immediately, proceeds from exits or secondary sales are reinvested into additional companies. For LPs not needing early liquidity, this recycling can enhance long-term returns by deploying more capital into investments. It also improves fund metrics like IRR and total value paid in (TVPI), aiding in future fundraising efforts. This post by Sapphire Ventures provides an in-depth example of how recycling can impact fund return multiples.
If the VCs don’t have immediate plans for near-term liquidity, LPs can use secondaries for their portfolio positions. Much like a private ETF, secondary investors can buy later-lifecycle portfolios with more mature positions. Conversely, sellers can generate cash flow opportunities outside of the fund.
On the buyer side, secondary transactions rely on deal access. Secondaries provide a viable opportunity for newer investors, including angels and micro-fund managers, to buy ownership in companies they would not have been able to invest in directly. These are almost always later-stage companies, where there’s more demand for equity given that the companies are more established and have demonstrated success. Newer investors may see this as an appealing way to diversify their portfolio and participate in the value creation of a company soon before an IPO.
Because of these benefits and the increased interest in private markets as a whole, there has been a demonstrated increase in secondary activity over the past several years. Secondaries are particularly appealing to stakeholders such as family offices, high-net-worth individuals, and fund-of-funds that are newer to venture investing and therefore may not have access to primary investment opportunities.
If you're interested in tapping into these benefits and want a hassle-free way to invest, Sydecar can help. We make it easy to navigate secondary investments and boost your returns. Sydecar handles everything from automated banking and compliance to contracts and reporting for secondary transactions, so you can focus on deal-making. Visit our Secondary SPVs page to learn more and get started today.
Max Harris is the co-founder and CEO of Ticker Markets, a platform for private fund LP secondaries. Working primarily as a brokerage, Ticker aims to support liquidity solutions through the fund life cycle, connecting the secondary market to allow for lower mid-market individuals and family offices to access the growing pool of committed secondary capital. Before starting Ticker, Max worked in the aerospace and defence industry at Northrop Grumman, building out next generation space-based solar power technologies.
Venture capital is an illiquid asset class. Investments in private companies, whether directly or indirectly (through funds), are locked up to some extent until the company goes public or gets acquired. Secondaries have always been and remain a strong mechanism for investors to achieve some level of liquidity before a traditional exit opportunity arises. However, as the exit market (and therefore liquidity) has dried up over the last few years, the volume of secondary transactions has grown dramatically. The robustness and types of secondary opportunities for investors have similarly expanded, yielding new and exciting opportunities for buyers and sellers.
What is a Secondary Transaction?
In the private markets, a secondary sale is any sale of ownership in a startup (typically common or preferred stock) where the seller is anyone other than the company itself. For instance, an investor may purchase Series Seed stock and then resell it to another investor several years down the line prior to the company going public or getting acquired (known as “exiting”).
A Brief History
Around the turn of the century, private markets grew exponentially with new capital and investors flooding in. Allocators started investing more, and as the market ebbed and flowed, investors needed liquidity. They turned to secondary sales for this. However, secondary sales had a stigma, leading to a scarcity of buyers, hesitancy from sellers, and tight regulations.
The 2008 financial crisis significantly impacted secondary markets. As liquidity dried up, LPs were forced to hold positions longer than expected, spurring a rise in secondary buyers and transactions. After a period of stability, the market saw a resurgence in 2020-2022, driven by high valuations and substantial committed capital, which led to large, late-stage investments in overvalued companies. Rising interest rates and declining market sentiment caused valuations to drop, closing the IPO market and hindering M&A activity. Consequently, a new wave of secondary vehicles, funds, and marketplaces has emerged to address these liquidity challenges.
Types of Secondary Transactions
Direct Secondaries
The most common form of secondaries occurs via "direct" sales, where the underlying asset is equity in a company. Given the restrictions on shareholders and transaction volume that large private companies are subject to, secondary transactions can be difficult for these companies to accommodate. To bypass these hurdles, investors can use SPVs to buy company equity and then trade shares of those SPVs. While this strategy can unlock liquidity opportunities, such transactions can also be complex and difficult to manage.
Fund Secondaries
Sometimes, shares of private companies are sold as part of a larger fund. When these fund positions are traded, they are called fund secondaries. Fund secondaries make up an entire ecosystem on their own. The exact nature and structure of a fund secondary can take on many forms. Three main mechanisms are the most popular:
LP-Led Secondaries
If an investor becomes a Limited Partner in a fund, they can also access the secondary market. As private funds often extend beyond their planned divestment date, investors might face liquidity issues. LPs looking for full or partial exits can sell their positions to other fund investors, outside investors, fund-of-funds, or specialized secondary funds. These dedicated secondary funds are becoming increasingly common, providing more options for LPs to achieve liquidity.
GP-Led Secondaries
When a fund is nearing the end of its intended lifecycle, GPs can introduce liquidity by selling the fund’s ownership of select companies in a secondary transaction. This strategy is similar to that of a direct secondary. Often, these positions are bought by private equity firms or secondary funds. This group also encompasses strip sales.
Continuation Vehicles
If a fund has reached the end of its intended lifecycle, but the portfolio is still not ready for liquidation, GPs can turn to continuation vehicles. These involve effectively rolling the current portfolio into a new fund or vehicle, which can include adding new LPs. Oftentimes, LPs of the original fund can use this to sell their stakes for liquidity, and secondary funds can utilize this technique to gain exposure to late-stage portfolios. Such vehicles have become very popular over the past year, and are expected to be a core focus of the secondary market’s trajectory in the near future.
Benefits of Secondaries
The primary function of a secondary transaction is to create liquidity for the initial purchaser. This is especially relevant in VC, where investments are typically “illiquid,” meaning that investors won’t receive a return for five, ten, or more years. Secondaries allow VCs to return funds to their LPs without having to wait for a portfolio company to exit.
Secondary sales can also allow VCs to recycle capital back into a fund. Instead of returning funds to LPs immediately, proceeds from exits or secondary sales are reinvested into additional companies. For LPs not needing early liquidity, this recycling can enhance long-term returns by deploying more capital into investments. It also improves fund metrics like IRR and total value paid in (TVPI), aiding in future fundraising efforts. This post by Sapphire Ventures provides an in-depth example of how recycling can impact fund return multiples.
If the VCs don’t have immediate plans for near-term liquidity, LPs can use secondaries for their portfolio positions. Much like a private ETF, secondary investors can buy later-lifecycle portfolios with more mature positions. Conversely, sellers can generate cash flow opportunities outside of the fund.
On the buyer side, secondary transactions rely on deal access. Secondaries provide a viable opportunity for newer investors, including angels and micro-fund managers, to buy ownership in companies they would not have been able to invest in directly. These are almost always later-stage companies, where there’s more demand for equity given that the companies are more established and have demonstrated success. Newer investors may see this as an appealing way to diversify their portfolio and participate in the value creation of a company soon before an IPO.
Because of these benefits and the increased interest in private markets as a whole, there has been a demonstrated increase in secondary activity over the past several years. Secondaries are particularly appealing to stakeholders such as family offices, high-net-worth individuals, and fund-of-funds that are newer to venture investing and therefore may not have access to primary investment opportunities.
If you're interested in tapping into these benefits and want a hassle-free way to invest, Sydecar can help. We make it easy to navigate secondary investments and boost your returns. Sydecar handles everything from automated banking and compliance to contracts and reporting for secondary transactions, so you can focus on deal-making. Visit our Secondary SPVs page to learn more and get started today.
Max Harris is the co-founder and CEO of Ticker Markets, a platform for private fund LP secondaries. Working primarily as a brokerage, Ticker aims to support liquidity solutions through the fund life cycle, connecting the secondary market to allow for lower mid-market individuals and family offices to access the growing pool of committed secondary capital. Before starting Ticker, Max worked in the aerospace and defence industry at Northrop Grumman, building out next generation space-based solar power technologies.
Venture capital is an illiquid asset class. Investments in private companies, whether directly or indirectly (through funds), are locked up to some extent until the company goes public or gets acquired. Secondaries have always been and remain a strong mechanism for investors to achieve some level of liquidity before a traditional exit opportunity arises. However, as the exit market (and therefore liquidity) has dried up over the last few years, the volume of secondary transactions has grown dramatically. The robustness and types of secondary opportunities for investors have similarly expanded, yielding new and exciting opportunities for buyers and sellers.
What is a Secondary Transaction?
In the private markets, a secondary sale is any sale of ownership in a startup (typically common or preferred stock) where the seller is anyone other than the company itself. For instance, an investor may purchase Series Seed stock and then resell it to another investor several years down the line prior to the company going public or getting acquired (known as “exiting”).
A Brief History
Around the turn of the century, private markets grew exponentially with new capital and investors flooding in. Allocators started investing more, and as the market ebbed and flowed, investors needed liquidity. They turned to secondary sales for this. However, secondary sales had a stigma, leading to a scarcity of buyers, hesitancy from sellers, and tight regulations.
The 2008 financial crisis significantly impacted secondary markets. As liquidity dried up, LPs were forced to hold positions longer than expected, spurring a rise in secondary buyers and transactions. After a period of stability, the market saw a resurgence in 2020-2022, driven by high valuations and substantial committed capital, which led to large, late-stage investments in overvalued companies. Rising interest rates and declining market sentiment caused valuations to drop, closing the IPO market and hindering M&A activity. Consequently, a new wave of secondary vehicles, funds, and marketplaces has emerged to address these liquidity challenges.
Types of Secondary Transactions
Direct Secondaries
The most common form of secondaries occurs via "direct" sales, where the underlying asset is equity in a company. Given the restrictions on shareholders and transaction volume that large private companies are subject to, secondary transactions can be difficult for these companies to accommodate. To bypass these hurdles, investors can use SPVs to buy company equity and then trade shares of those SPVs. While this strategy can unlock liquidity opportunities, such transactions can also be complex and difficult to manage.
Fund Secondaries
Sometimes, shares of private companies are sold as part of a larger fund. When these fund positions are traded, they are called fund secondaries. Fund secondaries make up an entire ecosystem on their own. The exact nature and structure of a fund secondary can take on many forms. Three main mechanisms are the most popular:
LP-Led Secondaries
If an investor becomes a Limited Partner in a fund, they can also access the secondary market. As private funds often extend beyond their planned divestment date, investors might face liquidity issues. LPs looking for full or partial exits can sell their positions to other fund investors, outside investors, fund-of-funds, or specialized secondary funds. These dedicated secondary funds are becoming increasingly common, providing more options for LPs to achieve liquidity.
GP-Led Secondaries
When a fund is nearing the end of its intended lifecycle, GPs can introduce liquidity by selling the fund’s ownership of select companies in a secondary transaction. This strategy is similar to that of a direct secondary. Often, these positions are bought by private equity firms or secondary funds. This group also encompasses strip sales.
Continuation Vehicles
If a fund has reached the end of its intended lifecycle, but the portfolio is still not ready for liquidation, GPs can turn to continuation vehicles. These involve effectively rolling the current portfolio into a new fund or vehicle, which can include adding new LPs. Oftentimes, LPs of the original fund can use this to sell their stakes for liquidity, and secondary funds can utilize this technique to gain exposure to late-stage portfolios. Such vehicles have become very popular over the past year, and are expected to be a core focus of the secondary market’s trajectory in the near future.
Benefits of Secondaries
The primary function of a secondary transaction is to create liquidity for the initial purchaser. This is especially relevant in VC, where investments are typically “illiquid,” meaning that investors won’t receive a return for five, ten, or more years. Secondaries allow VCs to return funds to their LPs without having to wait for a portfolio company to exit.
Secondary sales can also allow VCs to recycle capital back into a fund. Instead of returning funds to LPs immediately, proceeds from exits or secondary sales are reinvested into additional companies. For LPs not needing early liquidity, this recycling can enhance long-term returns by deploying more capital into investments. It also improves fund metrics like IRR and total value paid in (TVPI), aiding in future fundraising efforts. This post by Sapphire Ventures provides an in-depth example of how recycling can impact fund return multiples.
If the VCs don’t have immediate plans for near-term liquidity, LPs can use secondaries for their portfolio positions. Much like a private ETF, secondary investors can buy later-lifecycle portfolios with more mature positions. Conversely, sellers can generate cash flow opportunities outside of the fund.
On the buyer side, secondary transactions rely on deal access. Secondaries provide a viable opportunity for newer investors, including angels and micro-fund managers, to buy ownership in companies they would not have been able to invest in directly. These are almost always later-stage companies, where there’s more demand for equity given that the companies are more established and have demonstrated success. Newer investors may see this as an appealing way to diversify their portfolio and participate in the value creation of a company soon before an IPO.
Because of these benefits and the increased interest in private markets as a whole, there has been a demonstrated increase in secondary activity over the past several years. Secondaries are particularly appealing to stakeholders such as family offices, high-net-worth individuals, and fund-of-funds that are newer to venture investing and therefore may not have access to primary investment opportunities.
If you're interested in tapping into these benefits and want a hassle-free way to invest, Sydecar can help. We make it easy to navigate secondary investments and boost your returns. Sydecar handles everything from automated banking and compliance to contracts and reporting for secondary transactions, so you can focus on deal-making. Visit our Secondary SPVs page to learn more and get started today.
Max Harris is the co-founder and CEO of Ticker Markets, a platform for private fund LP secondaries. Working primarily as a brokerage, Ticker aims to support liquidity solutions through the fund life cycle, connecting the secondary market to allow for lower mid-market individuals and family offices to access the growing pool of committed secondary capital. Before starting Ticker, Max worked in the aerospace and defence industry at Northrop Grumman, building out next generation space-based solar power technologies.
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