The venture capital (“VC”) market has evolved and grown substantially over the past decade. Until recently largely viewed as a more nascent private markets asset class, VC is starting to reach maturation, with secondaries transactions being a strong driving force.

While no longer a niche category, VC secondaries represent an area in which few investors have expertise or strong track records, and one that has typically thrived during times of uncertainty and volatility. This combination of an underserved space with favorable market conditions is generating strong interest from investors, who have become increasingly aware of the opportunity to diversify their portfolios and access venture returns with a shorter holding period, quicker drawdowns, a mitigated J-curve, and vintage-year diversification. Due to these characteristics, secondaries are more palatable in general for more risk-averse investors, as well as those who may not have much VC expertise but wish to add the asset class to their portfolios.

Join us in exploring this growing sector of the venture capital market in a series that will unpack:

  1. The venture secondaries transaction universe and considerations for investing in the growing opportunity set;
  2. Fundamental drivers of the secondary market growth, particularly the emergence of GP-led restructurings as a viable liquidity tool for General Partners and Limited Partners, alike;
  3. Investment implications for institutional portfolios and the role venture secondaries can play in the context of a broader private equity allocation.

Part I: Mapping the Venture Secondaries Universe: What types of venture secondary transactions are available to investors?

Venture Capital secondaries transactions can be split into two main categories: direct interest transactions and fund interest transactions. Each has unique attributes, dependent on the parties involved, resulting in a market of three core secondary transaction types:

Fund Interest Transactions

  • LP Interest: A Limited Partner (“LP”) in a venture fund chooses to sell its pro-rata interest to a buyer.
  • GP-Led Restructure: A structured process where LPs are given the opportunity to seek liquidity through a fund restructure. LPs may either choose to sell interests or to roll interests into new fund vehicles with reset economics. In a GP-led restructuring, General Partners (“GPs”) receive crystallized carry and an opportunity to continue to manage portfolio assets.

Direct Interest Transactions

  • Direct Company Secondaries: Company shareholders, early-stage investors or long tenured employees sell ownership interests. These can be in the form of individual transactions or structured tender processes orchestrated by Companies or brokers.

The Growing Opportunity in the Venture Secondary Market

The private capital secondaries market is growing, with 2021 projected to be a record year. Market volumes are expected to surpass the $88 billion closed in 2019. While the global pandemic has certainly exacerbated liquidity concerns for some investors, these sellers exist in all market conditions, as liquidity issues are not necessarily correlated to macro conditions, particularly among high-net worth individuals and smaller family offices.

GA graph 1

Secondary VC Transaction Volumes

In considering the VC portion of the secondaries PE market, we project that total Market Volume could be as large as ~$70bn in 2021 (direct secondaries: $61 billion, LP interests: $3 billion and GP Restructures: $6 billion). This is much larger than traditional estimates (typically based only on LP Interests and broadly marketed GP Restructures) and growing due to venture direct secondaries transactions, which represent as much as a staggering 87% of the overall market size. In the context of the pre-covid secondary market volume for PE and VC of $88 billion in 2019, the venture secondaries opportunity set is much larger and more meaningful than most realize when directs are included.[1]

[1] Source: Greenspring internal sources

GA graph 2

To put the market opportunity into even greater perspective for investors, the projected 2021 estimated total market cap of Series B or greater VC-backed companies is more than $1.1 trillion. Portion just 5% of that to secondary transactions, and the market opportunity for direct secondary dealflow equates to ~$60 billion. This is expected to increase year-over-year, with estimates for 2025 projecting a $1.8 trillion market cap.

Fund Interest Transactions

The venture secondary market continues to be a beneficiary of the growth in the primary venture market over the last five years, which has resulted in a solid inventory of funds for the secondary market. The market is expected to see continued and significant growth, dominated by the high projected volume of GP-Led restructuring transactions. The traditional secondary market for venture, including LP interests and broadly marketed GP restructures, in 2019 was around $6.4 billion, and 2021 is expected to be a record year with a forecasted volume of $9.1 billion.[2]

GA graph 3

The Rise of GP-Led Secondaries

GP-led restructurings are newer in VC than in PE and are no longer just the domain of troubled funds These transactions serve as a viable liquidity tool which can be used to support both existing and new relationships and are likely to play an increasingly significant role in the venture secondary market going forward. GP Led restructurings are winning transactions for all stakeholders, providing managers with additional exit options, more time to accelerate portfolio growth and relieve selling pressure, benefitting LPs through liquidity or the option to roll their interests, and giving new investors opportunities to invest in discounted assets with meaningful upside and shorter-term liquidity.

Considerations for Investing in the Growing Opportunity Set

With such a large and growing universe of secondary opportunities, GPs with relationship and informational advantages will be best positioned to compete in this market. In general, secondaries can be difficult to price accurately, and it can be hard to get a good handle on what kind of discount you are getting, especially on a portfolio of funds or a portfolio of directs. Experienced investors in funds that have holdings in those companies over time therefore have important insight into their valuations, which can make a real difference in the ability to make nimble and informed decisions in a competitive market. In addition, being known to companies and funds over time can result in being a preferred partner. The combination of this relationship and informational advantage can be the key to having a significant advantage in the growing venture secondaries market.

Next Up: What trends are driving the explosive growth in the venture secondaries market? Are they here to stay?


[1] Source: Greenspring internal sources

[2] 2016-2020E: Evercore venture capital secondary volume. 2021E derived from 2021 secondary volume estimate across PJT Park Hill while assuming Evercore’s 2019 venture capital figure % of total private equity, which is 8%.

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This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for any investment decision in any private investment fund or other vehicle managed or sponsored by Greenspring Associates, LLC or its affiliates, or for any other investment decision.  Recipients are recommended to seek independent legal, financial and tax advice before making any investment decision. The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. Information and opinions presented have been obtained or derived from sources generally believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. Any forward-looking statements, predictions or projections are subject to known and unknown risks, uncertainties and other factors which may cause actual results or occurrences to be materially different from those contemplated in such statements. The views contained herein are as of the date written and are subject to change without notice. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from Greenspring Associates, LLC.  The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

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