Direct Investing to Secondaries
For the past few years I've worked at multiple small time VC/Growth Equity funds in DC area. I love the small firm culture and have really enjoyed the deals and companies I've worked on. However, at my current job the macro environment and some poor managerial decisions have moved the fund into near distress. We recently got a new, highly capable manager but a lot of damage has been done...we basically need to fundraise in the next year to stay afloat. Put in other words, there is a high chance we shutter in the next year or two.
I'm far in the process with a Secondaries group that has grown rapidly and has some decent scale. I like the team and it really seems like a great firm/industry
My question is, would it be nuts to go from direct investing into Secondaries? I understand most people would sell their soul to get into Direct Investing so is it worth the risk to stay at my current firm? Would I be able to get back into Direct Investing if I decide I don't like Secondaries? Why do some people put down Secondaries? How difficult is fundraising in this environment for a new manager?
Most people are actually trying to get into secondaries.
Might I ask why? It seems that people getting into finance have the goals of being the top dollar earners and that seems to work way better at direct vs secondaries. What’s the big draw over to secondaries (beyond being growing/exciting space)?
The fact that it’s a growing space means it’s easier to fundraise and hence more winners (hence more money).
yes PE generally has higher upside, but in days of higher rates it really isn’t enough to do an unintegrated HVAC/IT Services/Healthcare/etc. platform and print money. Aside from the top MF/UMM players I would be very skeptical of joining a lot of traditional PE funds these days.
Lmao people giving bananas to an analyst 1 like he knows what he’s talking about… this site man.
People are not trying to get into secondaries, direct investing will always be the more competitive and lucrative field, esp long-term.
Interested, following
Probably depends on the type of secondaries, i.e., GP led (which should allow you to transition back into direct investing) or LP led (which may be more difficult but not impossible).
However, secondaries are the apple of many LP's eye at the moment and the talent in the space is good but there are still gaps. It is kind of a situation of fishing where the fisherman aren't. The current denominator effects LPs are facing and desperate need for DPI amongst GPs, is creating the perfect storm for secondaries. You could have a pretty strong run in the next 5-years allowing you to have some asymmetric upside relative to what you would have had in historic periods in the secondaries market. Also, secondaries are super scalable and will allow your firm to attract a pretty sizable AUM base if the team is any good, creating further upside.
People really need to wake up to how broken the private equity model now is. It was a zero interest rate machine. PE is going to be zombieland for the most part, with significant consolidation ahead
So then what is the implication on secondaries, in your opinion?
It will be a boon for secondaries. Flight to liquidity
I am curious - could this be a net positive for secondaries? I.e. if lots of zombie PE deals come about, secondaries can be a means for people to liquidate positions or get portfolios marked to market rather than by GP-dictated numbers. There could be a whole situation of trading commitments. There is an opportunity to buy a heavily discounted LP position and sell it at a discounted albeit less so % NAV, and pocket the different. Doesn’t matter if its a zombie if you can buy it cheap enough, sell it/have slightly better than the expected total shit exits for a little more, and pocket the difference. This way LPs are also not tied down to a shitty commitment and can free capital for actually good GPs. I’m not the knowledgeable on this side of secondaries so please feel free to disagree/share a different perspective!
It’s 100% a good thing for secondaries, which is why lots of players are trying to raise secondaries funds now
Why do you think secondary investors want to buy zombie assets where they won't get liquidity?
What parts of the model are broken in your opinion?
Personally I think secondaries are better medium term. Right now it’s a REALLY bad time. That is secondary direct investing into VC shares from founders and investors (not lp stake) if that’s what you’re talking about.
The upside is gigantic depending on the shops comp structure but unless you can close deals get new lps for a fund and obtain investors into an spv you’ll be sitting on your hands for quite some time.
As an example it wouldn’t be unheard of for you to get paid 8-2% in commission alone on a 100k-10m ticket for coin base before it went public. On top of that you could be seeing carry of 4-8% on that single security when it goes public.
So lets say you sold 100k of coinbase your firm took 5% in mgmt and you were payed 5% in comission. Thats probably a hnwi you just made 5k before processing and taxes. Coinbase was going for around 40-45 on the secondary market and ipoed as a direct listing at about 380. That’s a basically a 9x (rare for late stage returns based on the last secondary offerings) on top of the 5k now you might get 4% carry on each dollar so the 800k gained returns you 32k. On a 100k ticket of that nature you made 37kish. Crazy stuff. Now imagine that across other pre ipo companies and with larger deals. I know a few people under 30 who made over $1m from the 2020 and 2021 by marketing pre ipo shares.
The problem is the space has cooled off naturally and banks and other larger investment groups are quietly building out their own teams that could realistically steal the market from these dedicated firms and of course the platforms like forge. Basically if you have no product to sell and no buyer interest like now and for the next year or foreseeable future, you’ll have to use this time to build a network and have a very small salary of around 55-70k high end or minimum wage + draw with or without clawbacks. I think it’s better than your current role in general for money and sales but it’s not gonna make you rich for a while and will require a tremendous amount of work, patience, and accepting that you’re not really a VC guy rather an ir/bd guy who markets VC backed companies.
Theres only about 3 major players dedicated to late stage secondaries in nyc and San Francisco. So I’m curious if you’re looking at one of these shops.
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