Investment firms are amassing billions to acquire shares in tech startups backed by venture capital, driven by a prolonged slump in acquisitions and IPOs that compels early investors to sell their shares at reduced prices.
The secondary market for startups, a platform where investors and employees trade shares worth billions in private companies, is gaining prominence as traditional exit strategies dwindle and startup funding slows. Buyers in the venture secondary market are gearing up for a busy year, with startup employees eager to sell their shares and investors needing to redistribute capital.
Lexington Partners recently unveiled a new $23 billion fund dedicated to purchasing stakes from major investors, initially targeting $15 billion but increasing the goal due to strong demand. This move is seen as the beginning of a significant opportunity in secondary buying that could span years.
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This fund is set to primarily acquire shares from private equity, with plans to invest up to $5 billion in venture capital secondaries, according to a company spokesperson.
Venture capital firms report a surge in distressed limited partner investors needing to reduce their venture holdings. Lexington’s latest fund reflects the intense demand from LPs feeling overexposed to private capital, including startups.
Other firms like Pinegrove Capital Partners and StepStone are also raising multi-billion dollar funds to focus on venture secondaries, with StepStone gathering an initial $1.25 billion for its latest fund, aiming for a significantly higher total.
This influx of capital signals a resurgence in trading levels after a two-year dip, fueled by the growth of the secondary market over the last decade. This market has become essential for startup employees unable to cash out due to the scarcity of IPOs, with companies like OpenAI and SpaceX facilitating employee stock sales through secondary markets.
Nasdaq Private Market’s CEO, Tom Callahan, notes that the absence of IPOs and mergers creates immense pressure and opportunities for investors to buy into companies at substantial discounts.
However, the secondary market remains less regulated, more opaque, and less liquid than public markets, often described as a chaotic niche dominated by broker negotiations.
Despite a slowdown in secondary trades in 2022 due to late responses to rising interest rates, the gap between what venture capital firms ask for and what buyers are willing to pay is narrowing. This adjustment is leading to an increased supply of shares for sale, though hedge funds and institutional investors remain cautious, typically only investing in the most prominent private companies.
The entry of specialized secondary buyers with significant capital is expected to boost market volumes, with industry experts predicting a market correction that will spike trading volumes.
Forge Global reported a significant increase in trading volumes in the third quarter of 2023, a trend expected to continue. Recent sales on Forge were at about a 50% discount compared to the companies’ last primary fundraising rounds.
InvestX’s CEO, Marcus New, suggests that the coming months may offer the best buying opportunities in the last five years for those willing to navigate the market before a broader IPO recovery.
