Secondary Assets: a Two-Article Series

by Ali Moiz, Founder & CEO at SandHill Markets

Throughout the years, trends in markets have come and gone. But one prevailing trend is withstanding the test of time: the more players in the game, the more potential liquidity with which to play. So, where are all of the players, well, playing? How is it possible that with Q2 of 2023 being the slowest quarter for funding in AngelLists history since they started recordkeeping in 2013, are people still interested in even playing the game? One very convincing ballpark is the secondary market.

While it can’t be solely credited for recent market rallies, secondary trading certainly is an interesting option to explore. With market conditions forcing investors and companies to rebalance portfolios and the increase in share buybacks (ROFRs), it makes sense that the markets where these assets are bought and sold are booming. Instead of betting on overvalued IPOs, longer exit times, more private equity and VC money going into startups, or being patient to “wait it out,” smart investors are turning to the secondary market. More assets, more investors, more liquidity. 

What are they? 

Secondaries are assets that are being sold from the person, investor, or institution that owns them- not the company who initially issued them. These assets are often owned by employees who were issued equity, VC funds that invested when a company was private, shareholder stakes, etc. The key distinction here is that primary assets are assets issued by the primary owner, i.e. the company; secondaries are being sold by the secondary owner, i.e. the employee, investor, or institution. 

Where do you buy them?

Secondaries can be found in most markets, but the easiest and common way to invest in them is to find secondaries available on the public market - the New York Stock Exchange, Nasdaq, etc. 

Because of the infrastructure and rules in place to protect buyers, public secondary markets are a little easier to navigate than private markets. They have more transparency, requiring the latest purchase price per share to be visible to potential buyers and sellers, in turn allowing for easier due diligence, historical analysis, price matching, and valuation adjustments. Finally, they’re more accessible; it’s easier to set up a brokerage account and start investing on a public secondary market than it is a private market. 

That said, there is a secondary market for private stock that presents an equally exciting opportunity. In this market, shares of non-public companies are traded privately, meaning the trades won't be found on the floor of Nasdaq. The infrastructure seen in public markets isn’t there, nor are the overarching regulations and required disclosures. As such, it comes with certain limits: there are restrictions on stock transfers, price transparency isn’t as clear, diligence is harder, and one must be an accredited investor in order to participate. This market can be tricky to understand supply and demand: buyers can’t easily see the availability of the stock they’re looking to buy; conversely, it makes it hard for sellers to understand the demand of the assets they hold prior to selling. In the same vein, the lack of publicly disclosed information that the more traditional “stock market” requires makes price discovery more difficult. 

So, why now? 

What makes this a great time to consider secondary trading? Consider this: between 2012 and 2021, the global market for secondaries grew from $13 billion to $60 billion. 

The growth in secondary trades is staggering. On top of that, an influx in VC funding has allowed companies to stay private for longer. Instead of being forced to IPO or otherwise exit to get the cash they need to stay alive, companies are turning to VC funding to do the same thing while allowing them to stay private. Raising funds while private allows companies to avoid the regulations and reporting required on the public market, and allows the ownership and cap table to be controlled largely internally. As we see companies taking longer to exit, secondary transactions emerge as a way for companies to offer liquidity to early investors and employees, while staying private. 

Secondaries also offer investors a chance to diversify their portfolios by giving them access to new industries, vintages of stock, sectors, and risk profiles. Similarly, because secondaries are stocks that have been previously issued, they are often farther along into their investment lifecycle and can offer earlier returns. 

The growth in the secondary market has provided a much needed outlet for investors looking for something new. The stigma of secondary trades is long gone, as are the days of quick IPOs, early exits, and big liquidity plays. Instead, secondaries are positioned to allow more investors the chance to get into companies they previously couldn’t get access to. This access comes with the potential for earlier returns, more fruitful trades, and portfolio diversification. The growth in secondary trading has made this niche become one of the most liquid and exciting avenues for investing. 

Look for Part II of this article to come and register for the November 28, 2023 webinar online here!