How Secondaries Provide Liquidity Solutions

Google's record-setting Wiz acquisition marked a shift for M&A and IPOs. But it's secondaries that are having a moment. OpenAI, Databricks, Ramp, Rippling—all recently ran tenders. And it’s not just about cleaning up the cap table or satisfying an investor’s ownership target. Secondaries are becoming a strategic asset. According to Pitchbook data, more than half of the late-stage growth rounds over the past six months have had a secondary component attached to the deal. This is up from 20%-30% a few years ago. In a prior life I’ve structured secondaries as a part of $100M late-stage fundraises, and they were focused on cleaning up the cap table for inactive investors and prior execs/founders. This new breed of secondaries is primarily for current employees as a way to attract and retain talent. It alleviates pressure for liquidity via M&A or an IPO and provides employees the chance to buy homes, pay off debt, or pay for their kids' school. Investors can solve for ownership targets, management can use it to retain talent, employees can realize financial goals – all without added dilution. If you’re thinking about a secondary, ask yourself: ▶️ Is this about meeting investor ownership targets without additional dilution? ▶️ Rewarding current employees or cleaning up the cap table? If it’s for current employees: ▶️ What percentage or dollar threshold are they allowed to sell to ensure they are still motivated to work hard? For a secondary, you’ll need to share financials, gate participation, navigate internal politics, and really think through every loose end before proceeding. However, when done right, it can create value across stakeholders. 1/ Founders/employees can meet near-term financial goals. 2/ Investors solve for ownership requirements without additional dilution. If you’re raising a later stage round and it’s a competitive deal, it’s worth weighing secondary as an option. Would love your thoughts in the comments!

Over each of the past 2 years, just 𝟱% of the total VC market value has been distributed to LPs—leaving a 𝗺𝗮𝘀𝘀𝗶𝘃𝗲 𝗴𝗮𝗽 𝗶𝗻 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆. What can GPs do? 𝗘𝗻𝘁𝗲𝗿 𝗖𝗼𝗻𝘁𝗶𝗻𝘂𝗮𝘁𝗶𝗼𝗻 𝗙𝘂𝗻𝗱𝘀 💡 • LPs are restless for liquidity. While recent fund vintages don't have DPI to give, more mature venture funds are stretching well beyond their original 10-year timelines. 1-to-2 year extensions are manageable, but after 12+ years (with fees piling up), LPs understandably want their money back. •  Continuation funds have become a go-to strategy in private equity to fix this problem. LPs can either cash out or roll over their interests into a new vehicle. This provides liquidity for LPs who want to cash out while allowing long-term investors to stay invested & maintain exposure to the portfolio. According to a 𝗨𝗻𝗶𝘃𝗲𝗿𝘀𝗶𝘁𝘆 𝗼𝗳 𝗖𝗵𝗶𝗰𝗮𝗴𝗼 𝗕𝗼𝗼𝘁𝗵 paper: 🔹 +𝟳𝟱𝟬% 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 in deal value over 5 years, hitting $68 billion in 2021. 🔹 𝟴𝟬-𝟵𝟬% 𝗼𝗳 𝗟𝗣𝘀 in legacy funds opt to cash out rather than roll over. 🔹𝟰𝟰-𝟱𝟬% of total secondary market volume came from GP-led secondaries between 2020-2023—that is, $102-126 billion annually. However, there are challenges, particularly in venture capital: 🔹 𝗤𝗦𝗕𝗦 𝗘𝗹𝗶𝗴𝗶𝗯𝗶𝗹𝗶𝘁𝘆: When a continuation fund buys assets from the original fund, LPs might lose their QSBS eligibility. QSBS typically requires the stock to be held directly by the taxpayer or through a pass-through entity (like a VC fund) for at least 5 years. Careful tax structuring around this is possible, but it adds complexity. 🔹 𝗖𝗼𝗻𝗳𝗹𝗶𝗰𝘁𝘀 𝗼𝗳 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁: GPs may collect more fees and carry without full performance alignment, creating tensions between LPs & new LPs. Also LPs often lack sufficient data for informed decisions. 🔹 𝗡𝗼𝘁 𝗮𝗹𝗹 𝗟𝗣𝘀 𝘄𝗮𝗻𝘁 𝗼𝘂𝘁: Some LPs may prefer to stay invested—there's no "status quo" option; LPs forced to cash out or accept new terms. 🔹 𝗖𝗼𝗺𝗽𝗹𝗲𝘅𝗶𝘁𝘆 𝗮𝗻𝗱 𝗥𝗮𝗿𝗶𝘁𝘆: While this strategy is relatively common in PE, it's uncommon in VC, at least from my experience. Would be interested to hear how costs and time play a role in this strategy. Cooley has offered some alternative strategies for creating liquidity while managing ongoing investments in a VC fund (link in comments). 𝗕𝗼𝘁𝘁𝗼𝗺 𝗹𝗶𝗻𝗲: Continuation funds are an option to provide liquidity to LPs without forcing GPs into bad exits. But GPs need to provide full disclosure of all potential conflict of interest and have full alignment with a majority in interest of their LPs. Thoughts? Anyone else seeing this trend? How are GPs balance their LP liquidity needs with long-term value creation for their portfolios?

🚨 Blackstone signals a big move in private credit secondaries 🚨 Blackstone is weighing the launch of a dedicated pool of capital to buy stakes in existing private-credit funds. A sharp pivot from its current approach of doing these deals out of its flagship secondaries vehicles. The strategy would sit inside Blackstone’s $87 billion Strategic Partners unit and targets the fast-growing market for “second-hand” credit assets, where investors seek liquidity before a fund’s contractual end. ⬇️ What this means: A market hitting escape velocity. Privatecredit secondaries transactions hit a record $160 billion in 2024 and could jump to $220 billion in 2025. Liquidity meets yield. Distributions in traditional private-credit funds have slowed, so LPs are turning to the secondaries market to recycle capital without sacrificing double digit IRRs. Institutional & affluent demand. Technology and evergreen fund structures are opening private credit to high-net-worth investors, pushing retail assets in the space above $300 billion and accelerating the need for efficient exit routes. ⬇️ What to watch next: Fund size & structure. Will Blackstone mirror the $22 billion size of its latest PE secondaries fund or start smaller to test the water? Pricing reset. Secondary market discounts on private credit NAVs have been narrowing; expect more competitive auctions and tighter spreads if a heavyweight like Blackstone comes in. Competitive ripple. Look for Apollo, KKR, and Ardian to scale their own credit-secondaries sleeves in response. 🔍 Bottom line: Blackstone’s move underscores how secondaries are becoming a critical piece of the private-credit ecosystem, providing liquidity, shortening J-curves, and broadening investor access. If the firm green-lights a standalone vehicle, it could be a catalyst that turns private credit secondaries from a niche into a core portfolio allocation. 👇 How do you see this reshaping the private markets landscape? Drop your thoughts or message me to discuss. #PrivateCredit #Secondaries #Blackstone #PrivateMarkets #AlternativeInvesting

Insights from "The Secondaries Market: A New Normal for Exits?" panel at SuperReturn, featuring Cari Lodge (CF Private Equity), Joseph Marks (Capital Dynamics), Ankit Sud (NewView Capital) and Laura González-Estéfani (TheVentureCity): Liquidity as a Strategic vs. Reactive Option Historically, secondary sales were frequently seen as a "last resort" for liquidity—but today, they're increasingly a first class citizen. Companies as early as Series B with under $50M revenue now proactively offer employee tenders, leveraging secondaries as employee-retention tools, rather than merely an emergency option for expiring options (see: Stripe’s recent secondary). Pick the Right Vehicle for the Job The panelists underscored that not all secondary transactions are created equal. LP stakes, continuation vehicles, direct share sales, and employee tenders each solve distinct problems for LPs, GPs, and founders. Investors who excel in managing LP stakes may not succeed in direct founder negotiations, highlighting the need for tailored expertise as the market continues to mature. From Liquidity Gap to Secular Shift The explosion of secondary transactions in venture capital isn't just cyclical—it's structural. With the IPO market basically stagnant, secondary markets are evolving rapidly and projected to potentially equal primary markets as a source of liquidity within a decade. Transactions like the NEA spin-out ($1 billion provided across multiple funds and nearly two dozen board transitions) underscore this trend. The upshot? Secondaries are becoming an important part of portfolio strategy, and present an opportunity for LP's and GP's to take advantage of structural shifts in liquidity to gain strategic advantage and unlock differentiated returns.

A growing percentage of private-equity exits is coming from sales to continuation vehicles, funds that allow firms to continue to own and manage portfolio companies while giving their investors a chance to cash out. These funds rose to prominence as a tool for “zombie funds” to restructure. Managers later realized they could use continuation funds to hold onto their best companies, reaping more of the returns, instead of selling them to a competitor and allowing them to do so. Amid high interest rates and uncertainty over tariffs, firms are increasingly using them as a tool to give investors desperately needed cash while avoiding selling in a tough market. https://lnkd.in/ee_TKAPy

One person's loss is another person's gain. We have hit the lowest VC distribution environment since the global financial crisis. This is creating urgency for VCs to return cash to LPs. This is leading some investors to make short-term sacrifices to make their LPs happy and create some liquidity. Usually, VCs preach patience, waiting for the long-term massive exits. But already extended horizons for LPs have forced some hands early: - To generate liquidity, VCs are selling secondary stakes in top portfolio companies at discounts as high as 60% compared to the valuations set by previous funding rounds. - A cash-flow positive high-growth startup is even running a small primary fundraise with a large secondary component where early VCs exit at a discount - Eager for returns after 14 years of drought, some VCs accept leaving cash on the table versus chasing maximal gains The dynamics reflect changed attitudes about the viability of outsized returns in the long run versus securing cash for LPs now. With distributions at 14-year lows, locking in 2-3X return now starts to appeal more even if 25X seems possible someday. In summary, despite aiming for home runs, VCs are shifting strategies in this environment to get singles and doubles multiples on their investment. Smaller funds and syndicates that are buying the secondaries at discounts and have the patience to wait are the ones really winning. #vc #investing #invest #founder #angelinvestor #venturecapital

The sale of a 12% stake in a Group 11's second fund for $20 million to Industry Ventures and StepStone shows how the secondary market is becoming an important source of liquidity for investors in venture funds This is Group 11’s third sale of a secondary stake in one of its funds since last year. The deals returned a total of $96 million to the venture firm’s LPs. In its latest secondary deal, investors analyzed Group 11 fund’s portfolio and offered a price they would be willing to pay, which represented a 57% discount on the most recent fair market value of the fund, said Dovi Frances, general partner at Group 11. The discounts that secondary investors want now are higher than last year, with most of the sellers were high-net-worth individuals. The deal still provided a net cash-on-cash return of about three times for the LPs who sold their positions and a roughly 20% net investment rate of return, Frances said. Secondary funds are the only type of private funds that have gathered more capital globally this year than last, according to PitchBook. Such funds raised $68.1 billion in the first three quarters of this year, up 18% over last year’s total. Venture capital and growth strategies accounted for 14% of the total secondary sales by LPs in the first half of 2023, up from 8% of such deals in the first half of last year, according to Jefferies. The report attributed that shift to lower portfolio marks. 

PE continuation vehicles have moved beyond their “zombie fund” roots, and are now a standard tool for GPs to give early LPs liquidity while keeping high-performing assets in the portfolio and compounding returns (and fees) over a longer period. Rolling proven companies into CVs lets departing investors cash out and new investors buy in, and underscores how much the secondaries market has matured. https://lnkd.in/gxp5fAyV

For founders and early employees, building a startup is a long-term game, but sometimes, you need liquidity before the big exit. That’s where the secondaries market comes in. The secondaries market is where startup shares are bought and sold -- outside of the typical funding rounds. ➡️ Early employees can sell a portion of their shares. ➡️ Founders can take some money off the table. ➡️ Investors can get partial returns before the exit. Secondaries matter because they create breathing room for founders and employees (reduce financial stress and stay focused on growing the business), early investors (realize returns sooner, recycle capital and de-risk portfolios) and new investors (a chance to invest in high-growth companies late, but still ahead of an exit). The secondaries market is growing fast because it solves a real pain point -- liquidity in an illiquid world. For startup operators and investors alike, it’s becoming a critical tool to stay in the game for the long haul.