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Today: May 8, 2024
January 18, 2024
1 min read

Billion-Dollar Capital Surge: Snapping Up Bargain Start-up Shares

TLDR:

– Investment firms are raising billions of dollars to buy discounted stakes in venture capital-backed technology start-ups.
– The start-up secondary market, where investors and employees buy and sell shares in privately held companies, is becoming an increasingly important trading venue in the absence of traditional ways of cashing out and given a slowdown in start-up funding.
– There is a high demand from limited partner investors (LPs) looking to lighten their venture capital load, leading to the raise of multibillion-dollar funds by secondary market specialists such as Lexington Partners and StepStone.
– The secondary market has grown massively over the past decade and has become a critical release valve for start-up employees who have been unable to realize the value of their stock due to the lack of initial public offerings (IPOs) and mergers and acquisitions (M&A) activity.
– The secondary market is still more lightly regulated, more opaque, and far less liquid than public markets, but the arrival of specialist secondary buyers with billions of dollars to spend is expected to increase trading volumes.
– Recent share sales on secondary platforms have been priced at about a 50% discount to each company’s most recent primary fundraising, making it an opportune time for buyers to find bargains.

Investment firms are raising billions of dollars to buy discounted stakes in venture capital-backed technology start-ups as a long drought in acquisitions and initial public offerings (IPOs) forces early investors to offload their stock at discounts. The start-up secondary market, where investors and employees buy and sell tens of billions of dollars’ worth of shares in privately held companies, is becoming an increasingly important trading venue in the US, in the absence of traditional ways of cashing out and given a slowdown in start-up funding.

Secondary market specialist Lexington Partners last week announced a new $US23 billion fund to buy up stakes from “large-scale investors.” Other specialist firms such as Pinegrove Capital Partners and StepStone have also been raising multibillion-dollar funds to target venture secondaries.

The secondary market has grown massively over the past decade, with major banks, asset managers, and trading firms all investing in various trading platforms. It has also become a critical release valve for start-up employees who have been unable to realize the value of their stock because of the lack of IPOs.

However, the secondary market is still more lightly regulated, more opaque, and far less liquid than public markets. One venture investor described it as “a messy backwater market dominated by brokers on the phone.” IPO activity is expected to pick up later this year, but it is still likely to take several months for volumes to normalize.

Recent share sales on secondary platforms have been priced at about a 50% discount to each company’s most recent primary fundraising. Investors and trading platforms are hoping the arrival of specialist secondary buyers with billions of dollars to spend will increase trading volumes.

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