In this Q&A, the Nasdaq Private Market team outlines the state of the private secondary market and details how they help facilitate secondary sales.
Over the past couple of years, the private secondary market has experienced robust growth, with program value rising as the number of secondaries increases. In this Q&A, the Nasdaq Private Market team outlines the state of the private secondary market and details how they help facilitate secondary sales.
1. What does the private secondary market landscape look like today?
With private companies staying private longer, founders, former executives, early institutional investors, and other longstanding stakeholders are seeking liquidity more than ever before – especially with the influx of capital into the private markets. This is a dramatic evolution from just five years ago, when employees were the primary beneficiaries. Today’s private market participants are starting to show similarities to the institutions we recognize in the public domain. Nonetheless, the private secondary markets remain rather underdeveloped. The market is decentralized and a fragmented ecosystem of participants, consisting of smaller niche broker dealers and early stage technology platforms with limited oversight or controls, in contrast to the trusted public markets. Often times, buyers will ask: Are these shares real? Does the seller actually own the shares directly or through an SPV (special purpose vehicle)? Do they have unrestricted rights to transfer the shares? This has led to an environment with a lot of inefficiency, execution risk and lack of trust.
To take a step back, let us quickly define the current composition of the secondary private markets. The current market consists of two primary sources of supply: Issuer-driven tender offers and seller-driven secondary block sales. A private tender offer is a structured purchase of existing shares by the company or a third party investor, which could be part of a primary round or a stand-alone event.1 Depending on the number of eligible sellers and other factors, the transaction may need to be structured according to the SEC’s Regulation 14E (e.g., offer kept open for 20 business days).1 A tender offer is offered at a single price to all eligible sellers and requires active coordination across company counsel, management, and purchasers that leads to an involved administrative process. A secondary block sale involves a single seller or small cohort of aggregated sellers, typically longstanding executives, early investors or even employees to a single or syndicate of buyers. Historically block sales were for employees or founders only. But with private companies staying private longer, institutional sellers are looking to rebalance their portfolios and capitalize on their investments, many of which have been held for 10+ years. With this shift in sell-side supply, Nasdaq Private Market (“NPM”) has been an integral part of these conversations to help educate and bring awareness to the growing acceptance of realigning a private company’s investor base from earlier stage-focused investors to longstanding institutional partners. Since 2013, Nasdaq Private Market has facilitated secondary liquidity for over 33,000 shareholders, returning over $23Bn of value back to founders, employees and institutional investors.
2. How does NPM differentiate itself from other secondary players/platforms?
NPM was one of the first entrants into the secondary market in 2013 and acquired early market participant SecondMarket in 2015, with the mission to help private companies and investors address the challenges of liquidity through the trust of Nasdaq’s capital markets experience.
NPM is uniquely positioned given our close relationships with private companies, awareness of active institutional buyers, experience having executed over 300 transactions, and our connections to global banks, advisors and placement agents – all of which allow us to deploy a diverse approach to leverage the vast networks of our distribution partners. Whether a unicorn company or individual investor, we service all of our clients in the same manner, utilizing our full network and operational processes to enforce our institutional standards. NPM is a trusted partner to not only private companies, but also their stakeholders and influencers.
We work with vetted institutional investors who have a strong understanding of the opaque secondary markets and have an ongoing interest to gain access to private companies and potentially invest through secondary transactions. This allows us to act in an efficient manner for stakeholders looking for liquidity, while bringing sophistication to this decentralized market. We understand the need for discretion in all transactions, we run a highly curated process, and we have unique intelligence that enables us to establish ourselves as a trusted partner to address the complex needs of a company’s employees/shareholders.
3. What role does NPM play in helping facilitate secondary sales?
We service the full liquidity lifecycle; tenders, auctions and block trades. Our market strength is highly complex, multi-participant tender offers and we have evolved our offering in response to a company’s demands to deploy our same offering for individual block trades.
Our purpose-built technology provides the same levels of efficiency, transparency and confidentiality to secondary block sales. Because of our relationships with issuers and investors, we’re relied on to service the secondary capital location needs outside of broad-based tender offers. Our broker dealer allows us to act as an agent to locate capital for a secondary transaction and represent either the buyer or the seller, subject to applicable regulatory requirements.
Our objective is to deliver the best client experience, bringing the right players to each transaction to drive a competitive price. With the growing influx of capital into the private markets recently, we have seen an increased number of buyers getting comfortable underwriting secondaries. Our technology allows for the ability to capture bids and asks, potentially providing improved price discovery for stakeholders.
The interconnectivity of the private markets continues to lag the public markets and we see technology advancing further to allow for a more centralized marketplace approach. This is something that is lacking in the market today and a role NPM is addressing.
4. How does NPM’s block trades business further Nasdaq’s broader business strategy?
Nasdaq is at the center of the capital markets. Nasdaq recognizes the trend of private companies staying private longer and understands that in today’s market environment, managing liquidity does not just mean at IPO or acquisition, but begins at the earlier stages of a company’s lifecycle.
1 https://www.cooleygo.com/glossary/liquidity-rounds/
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