The secondary market for selling shares in ventures is the most active for two decades as corporate venture investors rush to find alternative ways to exit their holdings amid a difficult investment climate and a dearth of stock market listings.
Hans Swildens, CEO of Industry Ventures, one of the largest funds specialised in buying corporate venture investments, says the last quarter was the busiest for secondary transactions that he has seen since he started his firm 24 years ago.
Swildens launched his fund after the dotcom bubble when he started buying up corporate venture portfolios, including EDS Ventures, the venturing arm of Electronic Data Systems, and Enron’s investment arm after the US energy and commodities trading company went bankrupt in 2000.
“This quarter is the most active quarter for buying secondaries we’ve ever had in the history of our firm. If all the deals closed, this would be the largest deployment of capital we’ve ever had in one quarter in secondaries,” Swildens says.
The firm focuses on three main types of secondary market transactions: It will buy entire venture portfolios from bankrupt companies or from discontinued CVCs; it buys stakes in portfolios that CVCs still support but want to sell to outside investors; and it acquires venture equity in companies that CVCs want to sell because they are no longer strategic.
All transaction types are active
It is also common to see financial investors that already have a small LP position in a CVC fund buy a bigger position in a portfolio of companies in the same fund at a discount.
All these types of transactions are active in today’s secondary market, says Swildens. Sales of equity in late-stage portfolio companies are most common, although he also sees stakes in early-stage companies being sold.
“This quarter is the most active quarter for buying secondaries we’ve ever had in the history of our firm.”
Hans Swildens, CEO, Industry Ventures
A drought in initial public offerings and mergers and acquisitions over the past three years has driven the large volume in secondary market transactions as CVCs seek alternative ways to exit their investments. Startup valuations are also resetting, which is contributing to more active buying and selling in the secondary market.
“In the last two years most of the corporate venture capital funds have been at the portfolio level trying to cut, burn and make sure they’re fully funded,” says Swildens.
Bid-ask spreads narrow
A big difference this year are changes in bid-ask spreads, which show the price that sellers are willing to sell and what buyers are willing to pay for the equity. The spread has narrowed this year compared with last as valuations have come down.
“Last year there were a lot of sellers. But there was a bid-ask spread in the market where they [sellers] all wanted to get their 2021 values,” says Swildens.
As valuations decline, he predicts the next two years will see a lot more transactions happening in the secondary market as bid-ask spreads continue to converge.
Buyers paid discounts to net asset value that averaged 33% in 2023 across all types of venture secondaries, says Laurance Levi, partner at VO2 Partners, a broker-dealer for secondary market transactions.
Institutional investors are lining up to buy these assets, with a large uptick in the amount of capital raised for secondary market investments. In the year ended 2023, almost $140bn was raised, and projections for the end of 2024 are $180bn, says Levi. The large amount of dry powder available for secondary investments is likely to keep the market active until IPOs return.
Buyers raise record amounts of capital
“There is a lot of capital out there looking for secondary investments,” says Levi. Buyers include large secondary institutional investors such as Industry Ventures, Blackstone and Hamilton Lane, as well as less typical buyers such as family offices, says Levi.
Despite all the selling, CVCs generally are in good shape to weather the drought in liquidity and are continuing to invest, says Swildens. “Right now, it doesn’t feel like a lot of corporate parents are distressed,” he says.
Corporates that recently shut down their CVC units include US insurer CSAA Insurance Group and US retailer Walmart, which closed its startup incubator, Store No. 8, earlier this year.
CVC structure matters
The way CVCs are structured has a large bearing on their ability to sell in the secondary market. The sale of venture equity can take much longer at units that invest off balance sheet, says Swildens. This is because the transfer of assets is subject to several processes including separate securities agreements, transfer processes and legal reviews.
Corporates are best positioned to sell venture equity if they are structured as a limited liability company (LLC). In this way, corporates can easily transfer securities to the LLC where they can be sold to limited partners or third-party buyers.
Corporates will increasingly structure their CVCs to have third party capital so that they can more easily deal with market cycles and liquidity issues, says Swildens. These kind of limited partnership structures allow corporates to “moderate and manage liquidity and capital need over a period of 10 to 20 years,” he says.
