Making Sense of the Secondary Market
The private market landscape is changing. As IPOs and M&A deals slow down, more investors are turning to secondary markets for liquidity. BlackRock reports that 2024 is seeing record-breaking volumes in secondary deals, and this trend shows no signs of stopping in 2025.
What Is a Secondary Transaction?
Think of a secondary deal as buying a used car instead of a new one. Instead of buying shares directly from a company, investors buy existing shares from current shareholders. This means the company doesn't create new shares, so other shareholders don't see their ownership diluted.
How Secondary Deals Work
Three main factors shape every secondary deal:
Price Setting
The price comes down to simple negotiation between buyer and seller. They consider the company's current value, how badly the seller needs cash, and how well the business is doing. Sometimes buyers can get a good deal if the seller needs quick cash.
Share Rights
When you buy shares in a secondary deal, you get exactly what the previous owner had - no more, no less. That's why buyers need to read the fine print carefully. The shares might come with specific voting rights or preferences that affect their value.
Getting Approval
Most secondary deals need a green light from the company's board. There might also be rules about who gets first dibs on buying the shares. Smart buyers check these requirements early to avoid wasting time on deals that can't happen.
Why People Sell
Founders
Many founders sell because they need cash for personal reasons. When companies stay private longer, founders might not want to wait years for an IPO or sale to access their wealth. But they have to be careful not to sell too much and lose control of their company.
Investment Firms
Investment firms usually sell for two reasons:
1. They've hit their target return and want to lock in profits
2. They're changing their investment strategy and moving money elsewhere
Why People Buy
Buying secondary shares has its pros and cons:
Benefits:
- Get into companies that aren't raising new money
- Sometimes get shares at a discount
- Start investing in successful companies right away
Drawbacks:
- Miss out on certain tax benefits
- Might get less money if the company struggles
- Need to do extra homework on the shares' history