April 24, 2024

A guide to understanding and investing in private equity secondaries

Types of secondary transactions

Secondary transactions are of two types: direct secondaries and fund secondaries. Direct secondaries involve investors selling shares of a company directly to another investor. 

Fund secondaries can be further categorised into limited partner (LP) secondary transactions and general partner (GP) led secondary transactions. LP secondary transactions involve an existing LP selling its stake in a fund to another investor, while GP-led secondary transactions involve a fund’s GP initiating a sale of one or more of its portfolio companies to a newly formed continuation vehicle with a new set of LPs.

Main factors driving growth

As more individuals and institutions participate in investing, secondary markets naturally expand. Factors such as financial literacy initiatives, easier access to investment platforms, and technological advancements in trading platforms have broadened the investor base.

Growing allocations to venture capital, extended time horizons for startup exits, increased investor demand for liquidity and the proliferation of new secondary deal structures are some factors resulting in a large and expanding venture secondary market. 

Modern companies, especially those in tech, are remaining private longer for various reasons. In 1980, the median age of a company at its IPO was six years. In 2021, the median age was 11. In fact, from 1980 to 2000, there were more than 6,500 IPOs while there have been fewer than 3,000 from 2001 to 2022. That’s because private companies that face lower ongoing costs avoid the expenses associated with going public and prefer alternative exit strategies like secondary sales or mergers and acquisitions. 

Read more: Should you get a co-founder?

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