How Secondaries are Moving to be the Primary Exit Strategy for Private Funds
THE FOLLOWING IS A GUEST BLOG BY MAX HARRIS FROM TICKER MARKETS
The world of United States venture capital began after the end of WWII. Since the inaugural American Research and Development corporation fund in 1946[1], the land of venture capital and private equity has remained ever evolving, growing, and adapting, placing us now in an economic and financial climate much different from anything known in the previous century. An ecosystem took shape that demanded new forms of capital, vehicles, and investors. Venture capitalists, people that served as a connection between the investment dollars held by wealthy investors and the potentially high growth of new startups, became the focal point. And with this growth, came an expansionary influx of investors: from retail to institutional to corporations and endowments[2].
After several decades of fruitful growth[3] and opportunistic VCs, the early 2020s have presented a bubble pop that has blown away even the largest firms[4]. Funds are struggling to raise, capital is sitting un-deployed, and the most promising young companies are staying out of the exit lanes[5][6]. On top of that, in the larger monetary sphere, interest rates rose for the first time in years. In other words, it has been a perfect storm of negative drivers for the standard long-term, illiquid, and risky world of VC. And people needed a change.
With any asset class that requires firm and long term commitment, there will necessarily be some investments that don’t work. And some investors that can’t stick around. As such, secondary markets emerge. Except, in the proud and viscous world of VC, secondary sales remained obscure and risque for many years. Until the recent end to the ZIRP era, GPs were wary of exit via secondaries. And GPs found LP secondary requests onerous and annoying. But now, forced by the hand of Mr. Market, secondaries have begun to grow7.
Between funds taking longer to mature, and companies taking longer to exit, we believe GPs and LPs will turn to secondary sales as the new bona-fide go-to. According to Jeffries[7], 2021 presented a greater-than 100% increase in the secondary market overall, with an 156% growth in the LP secondary market. Since then, interest rates continued to rise, and the IPO market stayed shut[8], secondaries stayed high. The most recent data points to the vast majority of LP secondaries having stayed in the PE/buyout markets7. But, the VC market has seen a near-doubling of its share of LP secondaries, from 8-14% in 2022-237.
That’s not all. As more sellers enter the market, dedicated capital has steadily flowed in. Over $65B was raised in secondary funds during 2023 alone according to Pitchbook data[9]. With this growing market comes growing acceptance, and growing expectations of secondaries throughout the private sector. Private equity LPs are starting to see secondaries as the standard exit, and VC GPs are beginning to utilize them as a regular process as well[10].
Texture Capital is working to support Ticker Markets in bringing more accessibility and opportunity to smaller LPs and funds looking to enter the secondary market. Data strongly points towards secondaries being the new norm7. And as the technology and market evolves past these nascent years, Ticker is excited to work with great partners to enable new opportunities and reshape the landscape of private fund investing.
[1] https://ventureforward.org/resources-for-emerging-vc/vc-history/
[2] https://repositori.uji.es/xmlui/bitstream/handle/10234/203015/TFG_2023_Martin_Graterol_MiguelAlejandro.pdf
[3] https://repositori.uji.es/xmlui/bitstream/handle/10234/203015/TFG_2023_Martin_Graterol_MiguelAlejandro.pdf
[4] https://news.crunchbase.com/venture/global-vc-funding-slide-q4-2022/
[5] https://pitchbook.com/news/articles/venture-capital-dry-powder-2022
[6] https://www.nasdaq.com/articles/as-companies-stay-private-longer-advisors-need-access-to-private-markets
[7] https://www.jefferies.com/wp-content/uploads/files/IBBlast/Jefferies_Global_Secondary_Market_Review_July_2023_.pdf
[8] https://stockanalysis.com/ipos/statistics/
[9] https://pitchbook.com/news/articles/secondaries-pipeline-deals-2024-outlook
[10] https://www.collercapital.com/barometer-winter-2023-24/