Just as buyout funds began selling portfolio companies to other buyout funds post-2000, VCs now increasingly exit via secondary sales to other VC or PE firms. This has become a dominant liquidity path over traditional IPOs or strategic M&A.
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The old VC mindset of "let your winners run" and waiting for an IPO is gone. Today's GPs must act as fiduciaries by creating liquidity plans, proactively orchestrating secondary sales, and navigating complex buyout deals with partial rollovers to generate returns for LPs.
The traditional IPO exit is being replaced by a perpetual secondary market for elite private companies. This new paradigm provides liquidity for investors and employees without the high costs and regulatory burdens of going public. This shift fundamentally alters the venture capital lifecycle, enabling longer private holding periods.
Borrowed from private equity, continuation funds allow a GP to move a prized asset from an old fund into a new vehicle they still control. This provides liquidity to LPs in the original fund who can choose to cash out, while others can roll over and continue to ride the winner.
Sophisticated investors no longer use secondaries just to quickly build a private equity program. The strategy has matured into a core allocation, valued for offering faster deployment, better cash flow control, and consistent performance across market cycles.
A significant shift has occurred: private equity firms are no longer actively pursuing acquisitions of solid SaaS companies that fall short of IPO scale. This disappearance of a reliable exit path forces VCs and founders to find new strategies for liquidity and growth.
General Partners (GPs) have shifted from viewing secondary sales as an LP-driven nuisance to a strategic tool. They now facilitate liquidity for investors to maintain their reputation and use continuation vehicles to retain top-performing assets beyond a fund's original lifespan.
In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.
The secondary market began after 2000 by buying failed corporate VC portfolios for 10-40 cents on the dollar. Today, it has completely flipped; sellers are healthy, and transactions are typically done at a gain, not a loss, making it a core liquidity path.
Venture capitalists often have portfolio companies that are profitable and growing but will never achieve the breakout public offering VCs need. These companies can become a distraction for the VC and can be acquired by PE investors who see them as attractive, stable assets.
With fund lifecycles stretching well beyond the traditional 10 years, LPs are increasingly seeking liquidity through secondary sales. This trend isn't just a sign of pressure but a necessary market evolution to manage illiquid, long-duration assets.