more on public perception rather than investing fundamentals, leaving a significant number of valuable, privately held companies without access to liquidity on the secondary market.
Secondary exchanges are a great platform for smaller transactions when, for example, $100,000 worth of shares need to be sold and the diligence requirements of the buyer are minimal. In situations where larger stakes need to find a buyer or the company is looking for someone who can also participate in follow-on financings, these platforms are not the ideal place to unite buyers and sellers as most buyers on these exchanges are wealthy individuals and small institutions.
A small group of players across the globe have been making the headlines with large direct or secondary investments in promising internet companies. These include Digital Sky Technologies from Russia who has spent $800 million buying Facebook shares from employees; Elevation Partners, a US private equity firm; and Tiger Global Management, a US-based hedge fund. Similarly to the secondary exchanges, these funds tend to focus only on a few relatively mature companies, and are not interested in purchasing shares in the vast
majority of venture-backed companies. For a select group of companies, typically those that can transact at valuations well in excess of $1 billion, these buyers can have attractive attributes – the ability to write large checks, to provide some primary capital, and often to pay premium prices.
Broadly speaking, there are two types of secondary funds: direct secondary funds and indirect secondary funds. Direct secondary funds are investment firms with dedicated capital whose sole mandate is to provide liquidity to sellers of private company shares. These firms engage not only with individual shareholders of a given company, but they will also acquire complete portfolios from venture firms, corporations or family offices. Direct secondary funds assume ownership of the companies themselves and often times become
active managers of these assets (in some cases in partnership with the existing fund GPs). Indirect secondary funds, on the other hand, buy limited partnership (LP) interests in other investment funds and basically replace current investors in a fund. They hold these stakes until the private equity fund sells their portfolio companies and distributes the capital. Indirect secondary investors typically do not have any direct involvement in the management or oversight of the underlying companies. A small number of indirect secondary funds will do select direct secondary transactions, but it is not a core part of their business.