VC Secondaries (and Lions and Tigers, Oh My)

I remember when “secondaries” was a dirty word or totally not understood in this industry. It usually meant a founder was cashing out some stock, now its a menu of options for founders and investors alike.

With the IPO window still creaky and M&A volume unpredictable, the secondary market has exploded into a $200 billion beast. It has become the “release valve” for an entire asset class rendering “illiquidity” a moot term!!

My partner David Frankel had the best metaphor for this the other day:

“It’s like the recycling of money where someone gets nickels each time the money takes a turn.”

And there are soo many flavors:

Continuation Funds

The GP says, “We love this company too much to sell it to strangers, so we’re going to sell it to… a new fund of ours.”

Strip Sales

Selling a slice of everything to get partial liquidity while keeping skin in the game.

LP Tender Offers

A coordinated offer for LPs to sell at a set price – useful for clearing out tired investors.

Direct Secondaries

The classic move. Selling a specific stake in a specific company. Fast, precise, but you lose the future upside.

Activity has increased ~8x over the past dozen years. They are sophisticated, high-volume, and absolutely critical to the venture ecosystem right now.

But as David said, every time that money spins around the recycling bin with a discount, a little less of it makes it back to the people who put it there in the first place. This makes me understand why these funds are gaining popularity – you can shorten the hold period, break up a portfolio, etc much like how other financial instruments have been synthesized (from mortgages to commodities).

We talk about secondaries like they are a magic liquidity wand, but the data from Michael Greeley’s recent note shows the cost of that magic. The “discount to NAV” (Net Asset Value) varies wildly depending on what you’re selling.

I was looking at a “Liquidity Framework” from NewView Capital recently, and it struck me how many options are out there. It’s no longer just investing in start-ups; it’s a complex menu of financial and portfolio management.