Investing in private markets can be an option for those willing to navigate the complexities and inherent risks associated with this asset class. However, the nature of these investments comes with a fundamental truth: private markets are illiquid and most of the time investors cannot dictate the timing of a liquidity event. There are a few options for liquidity like exits, secondary sales, and tender offers that investors should be aware of when making these types of investments. In this blog, learn more about liquidity options for private market investments.
Private Market Liquidity
Understanding Private Market Investments
Private market investments include a variety of asset types, particularly venture capital and private equity in startups. Unlike public markets, where assets can be bought and sold with relative ease, private market investments involve long holding periods and illiquidity. However, there are a few ways liquidity may happen in the private market.
Exits
A startup going through an exit event like an initial public offering (IPO), merger, or acquisition may be one of the first liquidity events that come to mind for investors. However, it is important to be aware that not all IPOs result in a return on investment and some may not provide any liquidity for investors. The following are the main types of exit events that may occur:
IPOs
An IPO can be a game-changing event for a startup, which could provide liquidity for investors and potentially provide a return on investment. However, not all startups are suited for public offerings and some may undergo an IPO without providing liquidity for investors. When assessing potential opportunities, consider factors such as:
Market Readiness – Is the startup operating in a growing industry? Does it have a strong customer base and a compelling business model? Startups in sectors like technology, healthcare, or renewable energy may pursue an IPO when market conditions are favorable.
Financial Stability – Look for startups with sound financial metrics, including revenue growth, profitability, and cash flow management. These indicators may suggest that the company is mature enough to consider going public.
Management Team – A strong and experienced management team can be important for navigating the IPO process. Ensure that the startup has leaders with a track record of success and the expertise to manage the demands of public market scrutiny.
Acquisitions
Acquisitions are another common exit strategy for startups, which may provide an opportunity for investors to achieve liquidity through a buyout from larger companies or private equity firms. When selecting startups, consider the following:
Strategic Fit – Look for startups that have unique technologies or market positions that would be attractive to potential acquirers. Understanding the competitive landscape and identifying companies that complement larger firms may show the potential for acquisition interest.
Partnerships and Alliances – Startups that have established partnerships or collaborations with industry leaders may be better positioned for acquisition. These relationships may signal to potential buyers that the startup has strategic value.
Performance Trajectory – Assess the startup’s growth trajectory and market share. Companies demonstrating consistent growth and innovation could be more likely to attract acquisition offers.
Secondary Sales
Secondary sales may also be able to provide liquidity for investors by allowing them to sell their shares to other investors or funds before a startup’s exit event. While secondary sales may not be as common as IPOs or acquisitions, they can be an important consideration if purchasing in the private market. Key aspects to evaluate include:
Market Demand – Research the appetite for secondary shares in the market. If there is strong demand for shares in a particular startup or sector, it may provide an opportunity to liquidate the shares.
Investor Relations – Maintain open lines of communication with portfolio companies. Understanding their plans and timelines can help gauge the potential for secondary sales.
Tender Offers
Tender offers can also represent another potential liquidity option in the private market landscape, providing investors with an opportunity to sell their shares back to the company at a specified price. This process can occur in several contexts, such as during a company’s recapitalization or when a major shareholder seeks to consolidate ownership. The following are some key considerations regarding tender offers:
Execution and Structure – Tender offers can vary in structure, with some being open to all shareholders while others may target specific investors. Understanding the terms of the tender offer, including the price per share and any conditions attached, can be important for investors to understand.
Strategic Timing – Tender offers may be initiated during specific corporate events, such as before a merger, acquisition, or capital restructuring. Investors should be aware of the timing of and how they may align with the company’s overall strategy.
Market Sentiment – The reception of a tender offer can provide insights into market sentiment around the startup. If a tender offer garners significant interest from shareholders, it may signal confidence in the company’s direction and growth potential. Conversely, a lack of interest might indicate underlying concerns about the company’s future.
Key Considerations
For a private market investor, there are many considerations to keep in mind. First, private markets are inherently illiquid and investors should be prepared to hold on to their investment for an undesignated period of time. Holding periods can be upwards of 10+ years, and investors should be aware of the possibility of total loss of investment.
Additionally, there are various circumstances that can affect liquidity timelines. Foremost, timelines to liquidity can vary by company stage, capitalization, industry, and specifics related to the original investment. Was the original investment made directly in the company or was the investment opportunity part of a fund? Were the shares part of an existing sale? All of these questions may impact liquidity timelines, options, and results.
What Can Investors Do?
In the private markets, investors truly have two options: invest in private companies and be prepared to hold your investment until exit or failure or the alternative of not participating at all. Ultimately, investors should position their portfolios with the level of risk and liquidity they are able to tolerate, and if liquidity is a key aspect of your investment thesis, the private market may not be for you.
Final Thoughts
Investing in private markets requires can require a strategic approach of diversification and holding until a liquidity event occurs. Unlike public markets, private market investors often have limited control over the timing and execution of liquidity. However, by carefully aligning a portfolio with the level of risk they are able to tolerate, an investor may be able to meet their investment goals.
Want to learn more about investing in private companies? Check out the following MicroVentures blogs to learn more:
- Supporting Startup Growth: Stages of a Startup
- IPO Lock-Up Period: What is it, and Why Does it Matter?
- Fluff or Fit? Evaluating A Startup’s Pitch
- Beyond the Balance Sheet: Startup Metrics Beyond Financials
Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
