SeedBlink Blog

With record-breaking fundraising, increased participation from institutional investors, and a growing pool of late-stage companies seeking liquidity, Secondaries have firmly established themselves as a critical component of the private market ecosystem.

But what does this mean for investors? Let’s explore what you can expect when investing in secondaries, from potential benefits to key considerations.

The appeal of Secondaries

Immediate diversification

Secondary investments often involve portfolios of existing assets rather than blind pools of future investments. For investors, this means instant diversification across geographies, sectors, and maturity stages.

Faster liquidity

Secondary investments are inherently shorter-term compared to primary fund commitments. Since assets in secondary portfolios are already closer to exit, investors can expect faster distributions. Data from PitchBook reveals that secondary funds achieved a 21.4% internal rate of return (IRR) over a three-year horizon in 2023, outperforming many other private market strategies.

Discounted entry

Secondaries typically trade at a discount to net asset value (NAV). In 2023, venture capital funds were priced at an average of 68% of NAV, reflecting cautious buyer sentiment. These discounts allow investors to gain exposure to high-performing assets at attractive valuations.

Navigating the different deal types

Secondaries come in two main forms, each offering unique opportunities:

• LP-Led Deals - These transactions involve buying stakes in existing funds from limited partners (LPs). They are highly diversified, often encompassing multiple companies or even entire funds. LP-led deals accounted for 54% of secondary market activity in 2023, according to Jefferies.
• GP-Led Deals - General partner (GP)-led transactions involve the continuation of specific high-performing assets in new vehicles, often referred to as "continuation funds." These deals have gained popularity, with transaction volume growing from $14 billion in 2017 to $52 billion in 2023. They are typically more concentrated, allowing for deeper due diligence on individual companies but carrying a higher risk of concentration.

What to expect as a Secondary investor

1. Secondary investments bypass the lengthy capital calls typical of primary funds. Instead, capital is deployed quickly, giving investors immediate exposure to mature assets.
2. Unlike primary investments, where the future of the portfolio is speculative, secondaries provide visibility into existing assets. This mitigates blind pool risk and allows for more accurate pricing.
3. Secondary markets are not immune to broader market conditions. In 2023, private equity secondaries demonstrated resilience despite a 47% decline in global M&A value and an 83% drop in IPO activity. However, pricing and liquidity in secondaries are still influenced by economic cycles and investor sentiment.
4. Pricing secondary transactions is both an art and a science. Discounts can vary significantly based on factors like fund vintage, asset quality, and prevailing market conditions. For instance, older funds with limited growth prospects often trade at steeper discounts, while younger funds with strong upside potential can command higher prices.

Key considerations before investing

1. Building strong relationships with fund managers and secondary market players is crucial. Many top-tier deals are closed networks, requiring deep industry connections to participate.
2. Thorough analysis of underlying assets, fund managers, and market trends is essential. Investors must assess the quality and trajectory of the portfolio to ensure alignment with their investment goals.
3. Secondary investments often involve multiple layers of fees, including those from underlying funds and the secondary transaction itself. Understanding these costs is critical to evaluating potential returns.

The outlook for Secondaries

With $255 billion in available capital and projected deal volume exceeding $130 billion in 2024, the secondary market is poised for continued growth. Institutional investors are driving much of this activity, with firms like Blackstone and Pantheon raising record-breaking funds to capitalize on the opportunity.

Looking ahead, secondaries are expected to account for an increasing share of private market activity. Their ability to offer liquidity, diversification, and quicker returns makes them an attractive option for investors across the spectrum—from individual investors to large institutions.

Investing in secondaries offers a unique blend of benefits, from faster returns to discounted entry points and reduced risk. However, it requires careful consideration, deep due diligence, and strategic alignment with broader portfolio goals.

At SeedBlink, our Secondaries platform provides access to Europe’s most promising late-stage startups and high-performing portfolios. Whether you’re new to secondaries or looking to expand your exposure, we’re here to help you navigate this exciting space.

Ready to explore secondary opportunities? Visit SeedBlink’s Secondaries platform to learn more.

Explore secondary investment opportunities with SeedBlink.