There are two ways in which investors can access private equity: primary and secondary investments. Primary investments involve the purchase of company securities from the company. This might be done via a venture capital fund, a private equity fund, or even directly from the company itself. On the secondary market, company securities are purchased from an existing investor; a buyer might access these shares directly or through an investment vehicle. Historically, secondary funds were often considered a niche investment, even by those with experience with alternative asset class investments.
Now, that is no longer the norm. With startups choosing to remain private for longer, many investors are looking for ways to add equity in private companies to their investment mix via secondary transactions. Here, we will be reviewing what secondary investing is, why it has become an attractive option for certain investors, risks, and how to get started.
What is secondary investing?
A secondary investment offering involves the purchase of securities from existing investors of a privately-owned company. Generally, secondary offerings in private companies become available when an employee or shareholder wants to liquify their shares prior to an exit event such as an IPO or an acquisition. Late-stage secondary opportunities were traditionally closed off to investors outside of institutional venture capitalists, which is something that sets MicroVentures apart from other investment platforms within our space. We are typically able to source shares for secondary offerings from private investors or employees who are looking for liquidation. After sourcing shares, our team completes due diligence and finalizes the transaction.
Generally, we look for investment opportunities that meet the following criteria:
- Exit is speculated for the next 1-5 years
- Business model is defensible
- Traction in global markets
- User adoption is robust
Why is the secondary market growing?
Over the past two decades, funds specializing in secondary transactions have experienced notable growth (learn more about that here). As we have witnessed a shift towards higher private company valuations and increased maturity before pursuing a public offering, their shareholders have begun seeking alternative methods to achieve liquidity—one being secondary transactions.
What makes secondary funds an attractive option for certain investors?
For investors purchasing secondary shares, either directly or indirectly via an investment vehicle, secondary investment opportunities generally offer the chance to build portfolios of private investments, with diversification into a different asset class. Additionally, because secondary investments may be more mature (relative to primary investments), they may have shorter investment periods and faster ROI (if there is any return at all).
Risks to be aware of
Investing is always risky. Investments in privately held companies are highly speculative and involve significant risks due to inconsistent cash flows of the company, the nature of its proposed investments, potential conflicts of interest, among other things.
These investments are not suitable for anyone who does not have a high tolerance for risk and/or has high liquidity needs. You should invest only if you are able to bear the risk of losing your entire investment. There are no assurances that investors will receive any return of capital or profit. Additionally, there is no established market for secondaries. If you subsequently need or want to sell, there are limited, if any, opportunities to do so.
How to get started
You can sign up for a MicroVentures account here. Once you’ve completed the signup process and your account has been activated, you’ll be able to browse our current offerings that are available to you. Alternatively, if you’re looking to liquidate late-stage private stock, we would love to hear from you.
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.