Secondary buyouts have been a mainstay of the private equity industry for decades. In recent years, however, venture firms are increasingly picking up existing shares in secondary stock sales rather than injecting fresh capital.
Globally, firms executed significantly more deals in the past few years, per PitchBook data, than they did a decade ago. And while deal count can vary annually, the size of the deals over the past ten years has generally increased, with 2018 including some sizable examples.
The daddy of those deals, which closed in January, was the SoftBank-led $8 billion backing of Uber, valuing the business at a whopping $48 billion. Yet while the ridehailing startup's investment garnered the most headlines, 2018 has produced several other abnormally large secondary transactions. That includes another major deal with Uber (this time for $600 million), as well as a Francisco Partners- and GPI Capital-led $500 million investment in legal services specialist LegalZoom, valuing it at a reported $2 billion. Fintech Credit Karma's $500 million agreement with Silver Lake, giving it a reputed $4 billion valuation, rounds off the top four.
These all surpassed the biggest secondary deal of 2017, Brightfolk's $250 million investment in Swedish fintech Klarna.
Vehicles are becoming ever more complex and niche-focused to get in on these deals. Balderton Capital, for example, raised a $145 million fund earlier this month dedicated solely to secondary transactions in European scale-ups. And last year, Draper Esprit acquired the two opening funds of early-stage investor Seedcamp for €20 million, netting it a stake in fintech unicorn TransferWise in the process.
This development is most welcome for early-stage investors in an age when companies are staying private for longer. For instance, Seedcamp sold its funds—including the TransferWise stake—six years after first appearing on the TransferWise cap table. Since then, the fintech startup has added investors such as Index Ventures, Andreessen Horowitz and Baillie Gifford, all firms with much longer investment horizons than a seed investor like Seedcamp can tolerate without an exit.
Outside of early-stage firms desperate to start fundraising again, these secondary investments can also provide liquidity to individuals. SoftBank's Uber deal, for example, reportedly included purchasing shares from existing employees.
Another feather in the cap of secondary venture deals is the ability to provide a startup with more preparation for an upcoming IPO. As we noted over the summer, Spotify shareholders sold stock in a number of secondary deals prior to the company's direct listing, helping with price discovery for later investors.
But with more money and longer holding periods come familiar concerns. The fact that these deals are occurring and getting bigger suggests that traditional exit windows are closing or taking a longer time to reach, and that early investors are looking for increasingly novel ways to get out. This could, in turn, force many in that position into a corner, with their need for an exit becoming critical.
This post has been updated to remove a chart and conclusions drawn from an incomplete data set.