When choosing investments, an investor may come across a primary or secondary offering. There are many differences between primary vs secondary investing and in the world of private equity, understanding the distinction between primary and secondary investments is important for making informed investment decisions. While both types of investments offer exposure to the private markets, they can come with unique characteristics and risks. In this blog, we’ll explore some key distinctions between primary and secondary investments in private markets.

Primary vs Secondary Investing

What is a Primary Investment?

A primary investment in the private market is provided by an issuer, or a company seeking funding. Securities are created and sold in exchange for investment capital, commonly in the form of pre-seed, seed, or named funding rounds like Series A. The shares are transferred from company to investor upon closing of the round. Since the shares come directly from the company, they are considered primary investments.

How Primary Investments Work

In a primary investment, the investor provides capital to help fund a company in exchange for equity. The investment is typically illiquid for a long period of time while the fund or company grows, matures, seeks eventual exit opportunities (e.g., an IPO or acquisition), or fails, which is usually between five to ten years, but sometimes much longer.

Primary investments are commonly associated with early-stage companies that are seeking some of their first funding, but it is possible to have primary investments in later stage companies. Earlier named rounds, like Series A, B, and C, are traditionally considered early-stage investments. Because companies are not limited to a certain number of named funding rounds, issuers can sell securities across Series D, E, F, and onwards. However, these later named funding rounds may only allow institutional investors, like hedge funds or pension funds, to participate.

What Are Secondary Investments?

Secondary investments in the private market are provided by a shareholder instead of an issuer. These shares can come from any existing shareholder in a company, but are most commonly sourced from investors like employees, former employees, or individuals that purchased in the primary market.

Secondary investments are most commonly associated with late-stage companies but are not limited to late-stage companies. Some early-stage companies may have investors seeking to exit their investment position and therefore could be acquired in the secondary market.

How Secondary Investments Work

Secondary investments refer to the buying and selling of pre-existing interests in private equity, venture capital, and other private market assets. Unlike primary investments, where an investor can directly invest in a fund or company at the beginning, secondary investments involve acquiring shares from other investors who want to exit before it matures or is sold. These secondary transactions happen in what is called a secondary market.

Secondary markets are still considered risky and may also face higher entry prices, as the value of the underlying asset might be marked up due to the fact that terms may be different for a secondary offering than the original primary offering.

Right of First Refusal

A Right of First Refusal (ROFR) can complicate secondary investments by giving existing stakeholders the right to purchase shares before it is sold to a third party, potentially blocking or delaying the sale. This uncertainty may lead secondary investors to negotiate discounts or contingencies, while sellers may face restrictions on exiting or less liquidity.

What Does This Look Like?

Let’s take a look at an example. An investor may have made a primary investment in Company A. Perhaps a couple years later, they would like to sell that primary investment and exit their position in Company A. The investor could list Company A in the secondary market as a secondary offering. Once there is another investor willing to purchase the shares of Company A, the shares are transferred from investor to investor.

Key Similarities Between Primary and Secondary Investments

Both primary and secondary investments provide exposure to the private markets, which include asset classes such as private equity, venture capital, and other alternative investments. These markets are typically less liquid than public markets, offering higher growth potential but also involving more risk and uncertainty. Additionally, both types of investments can share a common risk and reward profile.

Liquidity

Private market investments are inherently illiquid and both primary and secondary investments can share some key liquidity characteristics:

Both rely on external liquidity events (like IPOs or acquisitions) for exits.
Both have restrictions on liquidity (such as lock-ups and ROFR clauses).
Valuation challenges persist in both markets, requiring subjective analysis based on available information.

Ultimately, both remain relatively illiquid compared to public market assets, and investors may want to be prepared for long holding periods.

Some Differences Between Primary and Secondary Investments

One of the main differences between primary and secondary investments is that the primary market is where securities are created, while the secondary market is where employees, former employees, or individuals who own primary offerings, can attempt to sell their securities.

Holding Terms

Additionally, the investment timeline can also be different. In primary investments, capital is committed for a longer period—typically 5 to 10 years or more—while the fund or company grows. Secondary investments, however, are generally made in more mature assets, which means investors may see a shorter holding period. However, there is always the opportunity for the company to stay private, like SpaceX, who has remained private for 23 years with no reported plans to go public.

Which Type Is Right for Me?

So which type of investment opportunity should a private equity investor be seeking when making decisions? That entirely depends on an investor’s personal situation, risk tolerance, and investing goals. Primary investment opportunities can be more risky than secondary investments, as they are more commonly associated with earlier stage companies that may not have the same user traction and achievements as a later stage company. However, secondary investments are not absolved of risk, and still have risks as all private investments, including total loss of capital. It also may not be possible to find a buyer for your primary shares in the secondary market.

Can Primary and Secondary Shares Be Listed Simultaneously?

Technically, a company’s shares could be listed on both the primary and secondary markets simultaneously, but the secondary investment opportunity most likely will be offered under different terms than a primary investment opportunity. For example, a company could be raising their Series C round in a primary investment opportunity. During this round, an investor in their previous Series B round may decide they want to attempt to exit their position in the company and lists their shares on the secondary market.

These primary and secondary shares could be listed simultaneously, but different rounds of funding often have different terms regarding price per share, valuation/valuation cap, and conversion provisions. In addition, an investor may not be able to receive the same terms for their primary investment as when they made their original investment. Secondary shares are often discounted from the original terms to make it more attractive for secondary purchasers.

Final Thoughts

Understanding the differences between primary and secondary investments in private markets can be important for making informed investment decisions. Both types of investments can provide access to private market opportunities, but they each come with their own set of characteristics. When deciding between the two, consider your investment goals, risk tolerance, and capital commitment preferences.

Want to learn more about primary and secondary investments? Check out the following MicroVentures blogs to learn more:

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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.

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