End-of-Life Funds
Because of today's extended exit timelines, many firms find themselves still holding illiquid assets several years past the end of their fund's investment period. A secondary transaction can provide liquidity to these funds and free the firm's investment professionals to focus on managing their more recent funds.
Founder Liquidity
For many company founders and early employees, their ownership stakes in a company represent significant portion of their personal net worth. To the extent that their personal financial needs change or they decide move to another start up opportunity, a secondary sale can be an effective means of providing liquidity for some or all of their ownership in a company.
Strategy Shifts
Changes in fund or corporate strategy frequently result in "stranded" assets or portfolios. A secondary sale of these positions is an effective way of disposing of those assets and generating a better return on investment as opposed to leaving them unmanaged.
Lack of Sufficient Reserves
In today's environment, venture capital and private equity firms frequently find themselves unable to provide necessary follow-on financing to all of theirs portfolio companies. Particularly in "pay-to-play" situations, a secondary sale to a new investor, with reserves and willingness to invest in a follow-on-round, can maximize the value of the investment and help the company raise sufficient capital to accomplish its growth objectives.
Asset Reallocation
Investors often make a strategic decision to decrease exposure to a specific asset class or stage of investment within their portfolio. A secondary transaction can be an effective tool for reallocating a portfolio's assets.
Orphaned Funds or Investments
The venture capital industry is currently undergoing a significant contraction resulting in fund closures and changes in general partnership structures. Consequentially, many investments and sometimes entire portfolios are left "orphaned" without investor oversight. A secondary sale of "orphaned" investments can often provide returns for those positions that would otherwise wither away unattended.
Regulatory Concerns
The increased scrutiny by regulators towards mutual funds and hedge funds, and the greater focus on valuations of private securities held by regulated entities have triggered many banks and investments institutions to consider disposing of their private investment stakes. A secondary sale is often the most effective way of liquidating their private company holdings.