Secondary transactions in venture capital are gaining prominence as investors seek liquidity in an environment where traditional exit routes remain constrained. However, market participants caution that while these deals may benefit individual sellers, they do not necessarily improve overall market liquidity.
A secondary transaction involves the sale of an existing stake in a private company or fund to another investor, rather than the company issuing new shares. As a result, no fresh capital flows into the business, and the underlying asset remains private and illiquid. What changes is simply who holds the exposure.
The market broadly operates through three structures. In limited partner (LP)-led secondaries, investors sell their stake in a venture fund, offering buyers diversified exposure across a portfolio. Pricing has generally been below net asset value, reflecting uncertainty and reliance on a small number of high-performing companies, a common feature of venture investing.
General partner (GP)-led secondaries, often structured as continuation funds, allow fund managers to transfer selected assets into new investment vehicles. While these transactions can provide liquidity options, they also raise concerns about conflicts of interest, as managers control pricing and deal terms while potentially earning additional fees.
Direct secondaries involve the sale of shares in individual private companies, often by founders or early investors. These deals are typically executed through special purpose vehicles and can offer closer exposure to specific assets. However, they are often characterised by limited transparency and compressed decision timelines.
The growth of secondaries reflects broader shifts in the venture ecosystem. A slowdown in initial public offerings and fewer exit opportunities have left investors holding assets for longer. As a result, many are turning to secondary markets to rebalance portfolios, even as the underlying liquidity challenges persist.
