The venture secondaries market has long been seen as the younger sibling of the much larger and more widely understood private equity secondaries market. Recently, however, with LPs in venture funds increasingly asking for liquidity and companies staying private longer, the VC secondaries market has become top of mind for stakeholders across the ecosystem.
New and existing secondary firms are raising record amounts to serve the market. In June, StepStone Group announced it had raised $3.3 billion for its sixth venture capital secondaries fund, crushing its $2.6 billion target. Nine months earlier, Industry Ventures raised $1.45 billion for its 10th venture secondaries fund, or 70 percent more than it raised for its previous effort. (Click here for our 2024 guide to VC secondaries.)
John Avirett, a partner at StepStone, tells Venture Capital Journal that the growth of the market is being driven by LPs hungry for distributions.
“As certain GPs do these transactions and LPs are getting these distributions back, LPs are now talking to their GPs saying, ‘Hey, I got money back from this strip sale, would you ever consider that?’” Avirett says. “I think it’s the beginning of a network effect, and we’ll have to see. Some will choose to do it, some won’t.”
It is hard to say exactly how large the VC secondaries market is. Industry, a pioneer in the space, has estimated that the market would hit $138 billion globally in 2023. It said the number was a combination of $85 billion of LP interests and $53 billion of direct secondaries transactions.
Industry defines venture secondaries as “transactions involving previously purchased investments, or assets, where the underlying value is in the form of equity value of a privately held venture-backed company (not to include M&A or publicly traded company related transactions).”
To accurately estimate the size of the VC secondaries market is next to impossible for a variety of reasons, chief among them being that secondaries transactions come in a wide range of forms involving a variety of buyers and sellers.
There are three main categories that VC secondaries transactions fall under: direct secondaries, which involve direct sales of investor, founder or employee shares in start-ups; LP interests, where a limited partner in a venture fund sells its fund commitment to a third party; and GP-led secondaries, where the general partner of a fund coordinates the sale of the fund’s assets to a new fund, sometimes within the same firm as a continuation fund.
“We believe venture capital secondaries will follow the penetration of private equity secondaries”
Gaurav Mathur
Pinegrove Capital Partners
Hans Swildens, founder and chief executive officer of Industry Ventures, has been engaging with the VC secondaries market for close to 25 years, longer than most anyone else. He tells VCJ that a key reason it is so difficult to estimate the size of the VC secondaries market is that many of the transactions are kept private due to the widespread use of non-disclosure agreements.
“To be involved in a transaction as a trusted counterparty, not talking to the press, not talking to competitors, not talking to LPs if you’re dealing with a GP – there’s basic engagement rules around counterparty conversations and information flow,” he says. “In the primary market, both on the fund side and direct side, people are more open with information because they don’t make everybody sign NDAs, but in secondaries everybody has to keep everything quiet.”
Swildens adds that many firms still wouldn’t publicize secondary transactions even if they weren’t bound by an NDA. “If you were a brand-name venture fund and 20 percent of your fund was in default or about to default because they somehow went bankrupt, or ran out of money, or were over leveraged, or whatever happened, would you want anyone to know that’s the case?” he asks. “Would anyone benefit from knowing? No. So I don’t think these things will ever be disclosed. A lot of them are too sensitive.”
Gaurav Mathur, co-founder of the brand-new dedicated VC secondaries investor Pinegrove Capital Partners, agrees that Swildens likely isn’t far off with his market estimate.
“We believe venture capital secondaries will follow the penetration of private equity secondaries,” he tells VCJ. “We think venture capital secondaries could become a $100 billion market by the end of the decade.”
Pinegrove, founded in 2023, is targeting $2 billion for its first vehicle, which is anchored with $500 million in capital via a sponsorship by Seqouia Heritage and Brookfield Asset Management. The firm describes itself as a provider of “customized and scalable secondary liquidity solutions for venture/growth GPs and LPs and focuses on investing into leading mid-to-late-stage private technology companies.”
Alan Vaksman, founding partner of Launchbay Capital in London, agrees with Swildens’ market estimate.
“We think that the [VC] secondaries market in total is probably around $120 billion to $140 billion, and that’s including everything,” Vaksman tells VCJ. “If you look at the direct secondaries market, we think that’s about $30 billion to $40 billion of actionable supply, because not all of it is traded. Out of that, we think about $3 billion to $5 billion actually changes hands every year. We pull data from brokers and funds, but this is still an estimate. We call it the last cottage industry of private equity because it is quite small.”
“As certain GPs do these transactions and LPs are getting these distributions back, LPs are now talking to their GPs saying, ‘Hey, I got money back from this strip sale, would you ever consider that?’”
John Avirett
StepStone
Founded in 2018 as Digital Horizon, Launchbay held a first close in January on $25 million for its debut VC secondaries fund, which is targeting $100 million. The firm has a unique approach to venture secondaries, investing only in direct secondary sales from founders, employees and early shareholders, and limiting its deal size to under $10 million.
Vaksman says this small ticket size ensures that Launchbay will not have any difficulty finding a buyer for the stakes, as it intends to use “30 to 40 percent” of its secondary portfolio purely to generate cash and sell either to other firms interested in the company or to pre-IPO buyers who are looking to build a position before the company goes public.
Stabilizers
Swildens argues that secondaries firms create more stability in the primary investing markets by offering opportunities for GPs, LPs and start-ups themselves to generate cash.
“I think it’s an underappreciated talent and role in the market,” he says. “It’s almost like we operate as a coach, a therapist, a bank account that they can ask for money from, and we are a stabilizing part of the market. If it was only a primary market and there was no secondary market, the market itself wouldn’t be very healthy.”
The role may become more appreciated in the near future as the venture secondaries market continues to grow. In the near-term, Swildens says a number of players that entered the primary venture market around the covid pandemic are now looking to exit, creating a spike in dealflow for secondary firms that have the dry powder to take over their stakes in companies and funds.
“We’ve been purchasing – and so have others – positions from hedge funds and mutual funds, and that makes sense,” he says. “Those funds have denominator issues and they also will sell securities that are never going to go public. If they don’t ever go public, then why are they sitting in a mutual fund?”
Mathur believes the venture secondaries market has already reached a size where it can continue to sustain its own growth as it develops.
“Similar to private equity secondaries and private credit over the last five to 10 years, we expect a maturation and productization of liquidity solutions for venture and growth equity,” he says. “GPs are increasingly thinking about portfolio management to deliver more predictable distributions to achieve their objectives.”
“If it was only a primary market and there was no secondary market, the market itself wouldn’t be very healthy”
Hans Swildens
Industry Ventures
Swildens echoes Mathur, predicting a long-term rise in the number of secondaries players and value of the deals. There are currently only a handful of sizable venture secondaries investors, including Industry, Pinegrove and StepStone.
Swildens says the industry is still in its early days and he expects more change as it evolves. “For 20 years we’ve had five new firms enter the market every year and not many have done it well,” he says. “There probably are going to be other big players that emerge, but I don’t know if they’re going to be organic. I also think the PE part will try to come into the venture part. There are 20 large-scale buyout funds, so why are there only two in the venture space? There’s space in the market for others.”