Your VC investments have been on your balance sheet for what feels like the lifespan of a Galapagos tortoise.

Exits through IPO and M&A aren’t happening.

What do you need to know?

Three things:

1. Secondaries are now primary.

Over the last 12 months, VC exits in the secondary market hit $61.1 billion in deal value. And dry powder in venture secondary funds more than doubled since 2022, while the IPO and M&A markets have remained sluggish.

The striking result: secondary exits just eclipsed IPO exits for the first time.

Transaction value by exit path, last 12 months

The days when secondaries were considered an esoteric exit path are long gone. Venture investors who are not exploring secondary avenues for exit, are not paying attention to reality: for many, particularly CVCs who have seen scant exits since 2022, secondary sales are now the primary ways to get liquid.

2. Understand whether you’re a “have” – or a “have not.”

Secondary markets, just like primary markets, have sectors that are in favor, and sectors that are out of favor. Two current VO₂ engagements show what it’s like to be a “have”, and to be a “have not.”

We closed a $400 million secondary sale in October in the AI space. Secondary buyer demand was very high. The transaction was oversubscribed, and we closed the round at a significant premium to the marked NAV.

That’s a “have.”

Separately, we expect shortly to close the secondary sale of a $90 million CVC portfolio owned by a large public company. The portfolio includes holdings scattered across sectors which in many cases are out of favor. We expect that sale to transact at a significant discount to NAV.

It will still be an attractive outcome for our client, in finding a high quality partner to take on the assets; eliminating balance sheet volatility at the corporate parent; cleaning up holdings that have become strategically non-core; and giving the team back their bandwidth.

But from a financial standpoint, the portfolio is a “have not.”

Yes, VC secondary discounts continue to narrow, and may be as low as 22% of NAV (in other words, .78 cents on the dollar) by year end.

But out-of-favor sectors will command meaningful discounts. And where NAVs remain marked at sky-high, pandemic-era valuations between 2020 and 2022, they will likely transact at heavy discounts: on average, 31% to 59% by some measures.

So, know whether you are a have, or a have not, and manage internal expectations accordingly.

3. Be Ready

Many large, well-regarded CVCs have recently shut down. (Here’s just one example.) This is part of the typical ebbs and flows of CVC activity that we’ve spoken on previously.

So if you want to initiate a secondary sale process, you will not be alone. There are a lot of CVC assets in market. It’s essential to present a clean, compelling and easily understood story to acquirers.

That’s what we do, and we’ll cover this more fully in another post.

But a few highlights to consider:

• ROFRs. Can you summarize the legal rights portcos have to exercise ROFRs? And the likelihood that they actually will? Buyers will be reluctant to engage if you can’t quantify the risk that their diligence efforts will be wasted by an investee’s exercise of a ROFR.
• Disclosure rights. Do you have rights to disclose information on all portcos sufficient to brief potential buyers – and if not, how do you handle it?
• Transaction structure. Everyone understands the plain vanilla secondary structure: the current owner sells their equity to a new buyer. But a continuation vehicle, a strip sale, or a structured transaction will be a better option in many cases. Ensure you are well versed in the options.
• Portfolio composition. In deciding which holdings to sell, have you struck the right balance between maximizing the NAV of the divestment portfolio you take to market to generate the most buyer attention – while keeping it sufficiently cohesive by stage, sector and geography that diligence doesn’t give a buyer a migraine?

Delivering venture exits in the secondary market is what we do.

Please don’t hesitate to reach out if a confidential briefing on the secondary market would be useful.