Distinct from the limited partner secondary market, the direct secondary market is characterized by a transfer of a directly held ownership interest in a company rather than a transfer of a fund of a fund interest or indirect ownership stake.
The direct secondary market creates an option for management and investors to sell their stock when the entire company is not being sold. Investment stakes can be sold in a single company or across an entire portfolio of companies. The sale of private company shares on the secondary market is becoming increasingly prevalent as the timelines to reach a liquidity event have lengthened over the last decade.
This trend has recently been exacerbated by institutional investors banks, insurance companies, family offices, hedge funds, mutual funds decisions to sell non-core investments and seek short-term liquidity, and senior executives looking to monetize some of their stake in companies before the company has matured enough to go public. A secondary transaction can be an important source of liquidity in a variety of situations, including:.
Saints Capital Union St. Saints Capital. The Direct Secondary Market. A secondary transaction can be an important source of liquidity in a variety of situations, including: Venture capital funds that are at the end of their fund life Venture funds with insufficient reserve capital to support their portfolio Providing liquidity to founders and early employees in companies whose exit timelines have been extended Hedge funds seeking liquidity for side-pocket funds.All rights reserved.
PitchBook is a financial technology company that provides data on the capital markets. Log in Request a free trial. Request a free trial Log in. PitchBook Blog. What are direct secondary markets? June 12, View comment 1. As the venture market continues to grow and mature, so does its direct secondary markets.
While securities are initially created in what is considered the primary market such as through an IPOexisting securities are traded in the direct secondary markets. More frequently, investors are looking to direct secondary markets as a release valve for liquidity in venture capital—where hold times are lengthening and companies are staying private longer. Put simply, the primary market is where securities e. Who is involved in the direct secondary market? One of the main populations to utilize the direct secondary market are the employees of privately held companies who receive equity compensation.
GPs and founders also commonly participate in direct secondary markets as they often have equity in portfolio companies. What are some advantages of the direct secondary markets? Due to the illiquid nature of private company shares, direct secondary markets serve as a mechanism to provide liquidity for those who own individual private company shares.
These transactions give investors the opportunity to realize value and return capital without a full exit. Secondary transactions can also help mitigate potential volatility when a company is first publicly listed. Shareholders who need liquidity get the opportunity to sell beforehand, which limits an early trading frenzy.
Direct secondaries also allow investors to gain access to high-growth and emerging technology companies that they were not able to access in the primary markets. What challenges do direct secondary markets pose? One of the greatest challenges is the general lack of transparency and scarcity of information on opportunities in the direct secondary markets. This opacity can make it difficult to efficiently conduct due diligence. Further, this market poses legal and regulatory obstacles due to the complexity of shareholder agreements and their impact on secondary transactions.Founders of Secondaries.
Sole focus of our founders is to benefit secondary transaction clients- whatever the occasion - be it liquidity need, rebalancing portfolio, regulatory trigger, LP swaps, tactical asset sale, we work to mitigate J curve effect, and generate better risk adjusted return for our clients.
Our clients benefit from our deep knowledge of "hard to find" attractive assets, investment opportunities, or interested investors looking to generate better risk adjusted returns through secondary investments. We work as extension of our client, with objective of developing long term partnership that endures vagaries of ever changing investment environment.
To know more about our founders, our workor how we work, please see appropriate sections. We look to enrich the platform with diverse experience of various partners who can help their clients achieve much sought after investments objectives, whether it be - a Pension Fund, a Sovereign Fund, an Endowment, foundation, PE fund, or any other institutional investment entity. International Private Debt Funds of global organizations, 2. International Private Equity Funds, 3.
To know more about our founder partners : please contact us with your specific message for a quick contact back from our relevant founder partner, Or else, if you're already in touch with our founder partner s and reached this website through their reference, then please follow the link sent by them to know more about them.
To know more about our founder partners, please contact us. Or else, if you're already in touch with them and reached this website through their reference, then please follow the link sent by them to know more about them.
About - Anil Kumar: To know more about Anil, check the above link. For further discussion, please contact us with your specific message for a quick contact back from our relevant founder partner. Anil Kumar, a key founder member of Secondaries.
He has led fund investment on behalf of International fund where he was responsible for investment origination of the fund. He built up, from scratch, a robust pipeline of investee cases based on special screening criteria developed as per client's needs. His origination capability encompasses the entire gamut of activities starting from ground zero to complete fruition.
Institutional clients depend on his deep origination capabilities to originate highly focused, niche transactions, his "investment judgement beyond spreadsheets"and focus to enhance client's portfolio ROI at fund level or at LP level. Access to opportunities - As a part of his advisory service, he keeps a hawk's eye on opportunities landscapeidentifies lucrative opportunities early on, and maintains a curated and rigorous database of fund managers across various asset classes.
He is always on the lookout, and goes that proverbial extra mile to find that elusive opportunity, fund manager that would deliver better risk adjusted return. His deep relations with institutional investors enable him to bring LP swaps, other investors in-case of exit needs of a client. Anil has been instrumental in structuring a technology fundfor a country, developing country level investment strategy for the technology fund, for a South East Asian country. He is responsible for creating strategic special purpose Fund of Fundon behalf of a Limited Partner which would deliver returns as per agreed benchmarks.
He was commissioned to deliver intelligence related to LP investmentsto alert LP of events that demand intervention, either to seize a limited time opportunity, or avoid potential pitfalls. He now offers this support to some clients.
This intelligence is custom built for a fund, and is delivered online. To discuss further, please contact him directly or else, please contact us with a message to him for a quick contact back from him.
Our founder partners provide liquidity solutions to institutional investors to sell their holdings in PE funds, portfolios of private companies, other PE assets, through secondary transactions.
Our support helps Institutional investors looking to mitigate J curve effect and generate better risk adjusted returns Our founders work alongside clients to understand their needs.
We provide : liquidity solutions to LPs, portfolio re-balancing, tactical asset sale support, GP led LP swaps, regulatory compliance led sale, In all situations, we support our clients all the way. This approach helps our founders to build and nurture enduring relationships with clients, take holistic view of their clients needs even when providing a transactional service.
Please contact us to discuss your specific needs. With ever changing investment environment, increasing expectations from investors or stakeholdersit is incumbent upon institutional investors to deliver, and exceed expectations.
With current team structures available to most LPs, and GPs, it becomes difficult to give full attention to a secondary transaction even if they have adequate internal resources. Our founders work just like an extension of client's team, but fully committed to pursuing secondary transactions on behalf of clients.In finance, the private equity secondary market also often called private equity secondaries or secondaries refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds.
Given the absence of established trading markets for these interests, the transfer of interests in private equity funds as well as hedge funds can be more complex and labor-intensive. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors, including "pension funds, endowments and wealthy families selling off their private equity funds before the pools have sold off all their assets".
Buyers seek to acquire private equity interests in the secondary market for multiple reasons. For example, the duration of the investment may be much shorter than an investment in the private equity fund initially. Likewise, the buyer may be able to acquire these interests at an attractive price. Finally, the buyer can evaluate the fund's holdings before deciding to purchase an interest in the fund. Conversely, sellers may seek to sell interest for various reasons, including the need to raise capital, the desire to avoid future capital calls, the need to reduce an over-allocation to the asset class or for regulatory reasons.
Private equity secondary market
Driven by strong demand for private equity exposure over the past decade, a vast amount of capital has been committed to secondary market funds from investors looking to increase and diversify their private equity exposure. The private equity secondary market features dozens of dedicated firms and institutional investors that engage in the purchase and sale of private equity interests.
More and more primary investors, whether private equity funds-of-funds or other institutional investors, also allocate some of their primary program to secondaries.
As the private equity secondary market matures, non-traditional secondary strategies are emerging. One such strategy is preferred capital, where both Limited Partners and General Partners can raise additional capital at net asset value whilst preserving ownership of their portfolio and its future upside. A common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership or LLC Member ownership interest in the fund s.
Nearly all types of private equity funds e. The transfer of the fund interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund. In addition to traditional cash sales, sales of fund interests are consummated through a number of structured transactions: . Typically, the investor will also sell a portion of the equity in the leveraged vehicle.
Also referred to as a collateralized fund obligation vehicle. A secondary buyer purchases an interest in an existing fund from a current investor and makes a new commitment to the new fund being raised by the GP.
Sincea limited number of spinout transactions have been completed involving captive teams within financial institutions. These portfolios historically have originated from either corporate development programs or large financial institutions. Typically, this category can be subdivided as follows:. The most notable [ according to whom? These type of secondary transactions have become increasingly explored since mid and throughout as many sellers did not want to take a loss through a straight sale of their portfolio at a steep discount but instead were ready to abandon some of the future upside in exchange for a bridge of the uncalled capital commitments.
The Venture Capital Fund of America today VCFA Groupfounded in by Dayton Carr, was likely the first investment firm  to begin purchasing private equity interests in existing venture capital, leveraged buyout and mezzanine funds, as well as direct secondary interests in private companies. In the years immediately following the dot-com crashmany investors sought an early exit from their outstanding commitments to the private equity asset class, particularly venture capital.
The surge in activity in the secondary market, between andprompted new entrants to the market. It was during this time that the market evolved from what had previously been a relatively small niche into a functioning and important area of the private equity industry. Prior tothe market was still characterized by limited liquidity and distressed prices with private equity funds trading at significant discounts to fair value.
During these years, the secondary market transitioned from a niche sub-category in which the majority of sellers were distressed to an active market with ample supply of assets and numerous market participants. The continued evolution of the private equity secondary market reflected the maturation and evolution of the larger private equity industry.
The secondary market for private equity interests has entered a new phase in with the onset and acceleration of the financial crisis of — Pricing in the market fell steadily throughout as the supply of interests began to greatly outstrip demand and the outlook for leveraged buyout and other private equity investments worsened.
With the crash in global markets from in the fall ofmore sellers entered the market including publicly traded private equity vehiclesendowments, foundations and pension funds.A verification email is on its way to you. Please check your spam or junk folder just in case. A link has been emailed to you - check your inbox. Don't have an account? Click here to register.
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StepStone smashes target on latest secondaries fund. Home Direct secondaries. Verdane exits to Nordic cleantech specialist. The firm is selling special metals services provider Scanacon Intressenter, which it acquired in through a take-private deal. Five new entrants shake up the SI Why Electra is a complex proposition. Will anyone be brave enough to buy them?
The Carlyle unit becomes the first outside investor in a group launched by a former Microsoft executive and strategist for Bill Clinton. Deal-by-deal directs players have a bigger role to play. This rare breed of secondaries player could help push tricky fund recapitalisations over the line.A verification email is on its way to you. Please check your spam or junk folder just in case.
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If the problem persists, please email: subscriptions peimedia. Secondaries Investor. Coronavirus and the secondaries market: the story so far. StepStone smashes target on latest secondaries fund. Home Direct secondaries.
The direct secondaries specialist is in talks with the European Investment Fund, Secondaries Investor understands. NewQuest plots Singapore office — exclusive.
The direct secondaries specialist is planning to open its fourth office this year, Secondaries Investor has learned. Industry Ventures makes two top-level promotions.
Cloud file-sharing service WeTransfer brings in secondary investors. Early shareholders in the technology company sold to a consortium led by HPE Growth Capital via a direct secondaries deal.
Deals Rod James - 16 April The Nordic direct secondaries specialist has hit the hard-cap on Verdane Capital X, which is double the size of its vintage predecessor.
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Direct secondary purchases of equity are increasingly being used by these funds alone, or in conjunction with other transactions, to provide exit opportunities for the holders of these securities. This article discusses some of the unique factors associated with direct secondary purchases in the US. Direct secondary purchases are purchases of illiquid equity interests in a private company directly from a holder of the securities, such as a fund, an investor, a founder or a member of management.
Direct secondary transactions differ from the secondary market for limited partnership interests, because there is a sale of a directly held ownership interest in a company rather than a transfer of a fund interest or indirect ownership stake. Direct secondary transactions can be for the sale of an investment in a single company or of investments in an entire portfolio of companies.
These types of transactions can be used by founders, employees and funds to obtain some liquidity in otherwise highly illiquid securities and to take some profit before a complete exit event of the applicable underlying portfolio company. As the length of time from investment to liquidity event in venture funded companies has gotten longer, and as many private equity funds have been unable to achieve exits in their anticipated timeframe, direct secondary transactions can: i provide boards of directors the ability to incentivise management to continue working towards an exit by allowing management to take some profit prior to a liquidity event; ii give founders an opportunity to obtain liquidity in their positions prior to a liquidity event; iii allow funds that have reached the end of their lifecycles without exiting all of their private portfolio investments to liquidate their positions; iv allow general partners of funds to liquidate investments in portfolio companies in connection with changes in partnership structures; and v provide venture funds with the ability to obtain needed liquidity to support other portfolio investments or to free up capital to grow their portfolio.
The market for direct secondaries for these types of sellers is likely to increase in coming years due to a number of factors. Investors, founders and employees are increasingly aware that there are alternative options to a single full company liquidity event. They have seen the markets for secondary sales that have developed for large, high profile companies like Facebook and Groupon and have increasingly sought the same type of liquidity for their smaller company equity interests.
In addition, venture-backed companies are often taking longer to reach a liquidity event.
DIRECT SECONDARY MARKET
These types of direct secondary transactions may begin to rise as the private equity and venture investments from the large cohort of and investment vintage age without achieving a liquidity event during their expected investment horizon. Purchasers that participate in the direct secondary market include a variety of funds. Some funds make direct secondary purchases from funds in which direct secondary transactions may be used in conjunction with purchases of limited partnership interests from fund investors or in a repositioning or restructuring of the general partnership in order to position the selling fund group for future fundraising activities.
Some funds focus on large institutional secondary sales, which may include secondary direct transactions, and some funds specialise in direct secondary transactions with individuals such as founders and management employees and venture capital investors.
Direct secondary purchase transactions from founders, management or investors can have some unique issues. Valuations for securities sold in these types of direct secondary transactions vary with the specifics of the company and transaction structure, but typically reflect a 40 percent discount from the current fair market value of the securities.
Transaction terms can also be structured to address valuation terms, such as providing for payments to sellers in the event the purchaser receives returns in excess of negotiated thresholds i. Purchasers in direct secondary transactions generally do not have the same negotiating power with respect to investor rights, such a board seats or veto rights, as they are not making a purchase directly from the issuer of the security.
Consequently, direct secondary purchasers typically receive only those rights which the seller holds.