TLDR:
Carta, a company that facilitated direct secondaries trading, recently shut down its secondary liquidity business, while Lexington Partners, another company in the secondary market, closed a record-breaking secondary fund. Private markets are evolving, and trust among market participants is crucial. The LP secondary market is large and mature, but the VC secondary market is different due to the unique characteristics of venture capital. Capital market innovators have sought to support the evolution of the VC asset category, and marketplace solutions have gained legitimacy and usefulness. However, most private companies prefer working with high-trust capital partners rather than being exposed to open market forces. The future of secondary markets depends on whether they become more efficient or not.
Key Points:
- Carta X operated as an agent to facilitate direct secondaries, while Lexington Partners operated as a principal focusing on LP secondaries in alternative investment fund interests.
- The LP secondary market is large and fairly mature, while the VC secondary market is different due to the unique characteristics of venture capital.
- Capital market innovators have built various components of marketplace infrastructure to support the evolution of the VC asset category.
- Most private companies prefer working with high-trust capital partners rather than being exposed to open market forces.
- The future of secondary markets depends on whether they become more efficient or not.
CartaX, a platform that facilitated direct secondaries trading, recently shut down its secondary liquidity business, while Lexington Partners, a leading player in the secondary market, closed a record-breaking secondary fund. On the surface, these headlines may seem contradictory, but they actually highlight the evolving nature of private markets and the importance of trust among market participants.
CartaX operated as an agent, aiming to facilitate direct secondaries by trading the shares of VC-backed companies between buyers and sellers. On the other hand, Lexington Partners operates as a principal, primarily focusing on investing in LP secondaries with the target securities largely comprising alternative investment fund interests. These different business models have different incentives and serve different end markets.
The LP secondary market is massive and fairly mature, although it still has inefficiencies. Companies like Lexington Partners, StepStone, GSAM, Blackstone, and Ardian have raised large vehicles in this market to take advantage of the current conditions. Institutional intermediaries such as Lazard, Jefferies, and PJT Park Hill also play a role in facilitating transactions in a managed and discreet process.
It is important to note that the LP secondary space is largest among the most mature and institutional alternative/illiquid asset classes, including real estate, private credit, and private equity. However, venture capital, although a fast-growing subset of the private equity asset class, has significantly different underlying characteristics. These differences, such as the power law driving returns among higher risk and lower profitability profiles, alter the nature of institutional participation in the VC secondary market.
With the growth of venture capital, the valuation fluctuations caused by zero-interest-rate policies, and limited exit options in recent years, both emerging and established fund managers need alternative liquidity options. Capital market innovators have been working to support the evolution of the VC asset category for the past two decades. Companies like SecondMarket, SharesPost, Forge, and Nasdaq Private Market have built various components of marketplace infrastructure, including custody, trading, equity research, and data solutions.
These marketplace solutions have gained legitimacy and usefulness as companies have remained private for longer periods. Some forward-leaning organizations have leveraged secondary trading data for price discovery to inform primary raises and employee stock option plans. Carta, known for its high-utility administrative tools and cap table data, has long been considered a leader in this space.
However, most private companies prefer being private and working with high-trust capital partners rather than being exposed to open market forces. This preference may change as capital market capabilities become must-have infrastructure, especially for mega cap pre-IPO companies with ongoing liquidity programs. Even in these cases, companies still manage who and how buyers and sellers can participate.
The recent closure of CartaX’s secondary liquidity business may be seen as a watershed moment where market forces push against the private market’s privacy. It remains to be seen whether the secondary market will become more efficient or if the long tail of unorganized one-off secondary transactions will narrow. The future of secondary markets will depend on how market forces and control evolve over time.
