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.
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Media reports of "manic activity" in secondaries are misleading. The market isn't irrational; it's simply experiencing massive growth. Annual volume has surged from ~$40 billion to over $200 billion in a decade, making experienced buyers exceptionally busy.
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.
The secondary market faces a potential capital shortage. The total available dry powder (~$200B) nearly equals the transaction volume expected this year alone. This tight supply-demand balance suggests a favorable risk-reward for new capital entering the space.
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.
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.
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.
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.
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.
