The State of the Secondary Market: A Post-Boom Reality Check

After the euphoric returns (on paper, at least) of 2020 and 2021, Venture Funds saw metrics like MOIC (Multiple on Invested Capital) and RVPI (Residual Value to Paid-In capital) shoot through the roof.

But while those numbers soared, DPI (Distributed to Paid-In capital)—the actual cash returned to investors—barely moved. It was the classic case of paper wealth with little actual liquidity.

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Many investors failed to exit during those "free money" years, as secondary investors, caught in the FOMO frenzy, were throwing cash around without even bothering with due diligence.

But every party has its end. Between 2022 and 2023, the market corrected hard. Shareholders’ sky-high pricing expectations clashed with the new reality, and secondary investors were no longer willing to overpay.

Let’s look at a graph from Carta showing the lack of DPI per vintage:

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This resulted in a deeply illiquid market as sellers held out for valuations that no longer made sense, while buyers had learned their lesson.

However, since December 2023, the market has started to reopen.

That long-awaited bridge between buyers and sellers is finally beginning to take shape.

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Where Does That Leave Us in 2024?

The need for liquidity is real, as fewer funds are showing strong DPI—always a red flag for the ecosystem.

Cash returns are the queen metric for raising new funds, and GPs are scrambling to boost DPI by offloading assets in the secondary market.

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But here’s the kicker:

• Direct secondary transactions are not the magic bullet many VCs hoped for
• NAV (Net Asset Value) often doesn’t reflect the brutal realities of the secondary market.

As a result, we are seeing buyout instruments—normally reserved for private equity—creeping into the venture world.

These tools help VCs juice up DPI metrics, but they’re still fresh and need fine-tuning.

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For the two people in the back that did not follow, here is the definition of the pref equity:

In a secondary fund-of-funds, preferred equity is a structured investment providing priority returns and downside protection. Pref equity holders receive a set return (e.g., 8-10%) before common equity holders, which makes it a stable, lower-risk option. It offers limited upside but first claim on profits, making it appealing for investors seeking steady income rather than high-risk, high-reward potential. This structure is common in secondary markets where portfolios are mature and risk mitigation is key.

Spoiler Alert: Historical LPs hate it - If you are interested in this this articles debunks every part of it: https://www.pwmnet.com/dpi-slowdown-how-to-find-alternatives-in-alternatives

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How Valuations are Evolving in 2024

In early 2024, a few transactions started popping up, but mostly at hefty discounts or more reasonable ARR/revenue multiples, aligned with public market valuations. Gone are the days of bloated numbers.

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In Europe, liquidity in public markets lags far behind the U.S., which means most tech companies eyeing an IPO will look across the pond. And if you're not IPO-bound?

Well, either you become profitable (a fairy tale for many), or you get swallowed up in a buyout. Both scenarios heavily impact secondary valuations, as exits drive returns.

And if those exit windows close, expect valuations to take a hit.

If you want to dig how to make a proper valuation in 2024, this article is worth every penny : https://www.kalungi.com/blog/saas-valuations

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Valuation Behavior in a Buyer’s Market

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2024 is firmly a buyer’s market.

Buyers are rationalizing based on public comps and applying steep illiquidity discounts, especially for "Road to IPO" companies.

The average discount between a Pre IPO company and a Pre LBO is ranging from 50% to 90%. For example, an average SaaS B2B software, will be priced around 8.0x the ARR compared to a 15x to 20x the EBITDA for an LBO company. An EBITDA is not the new crypto.

Meanwhile, for those on the "Road to LBO" (Leveraged Buyout), back-solved valuations are the new normal—buyers calculating what they can pay by looking at the expected return.

Which is not good news for theses companies, considering mounting pressure on founders and employees.

Founders are often buried under piles of pref shares, and employees are starting to realize they might not see much—if anything—from their stock options.

Because, let’s be realistic, back-solved valuation lead to cheaper valuation (or actually realistic one) but as secondary bankers, we have more than 50% of our deals where we priced the common shares at “0”.

Here’s why: if a company has a $300M valuation but has raised $250M, only $50M of that valuation is actually attributable to the common shares. This means that common shares are priced based on this $50M—not the full $300M. In some cases, we've even seen valuations fall below the total amount raised, effectively making the common shares worth “zero.”

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What to Expect in the Next 18 Months

1. LP-led secondaries will dominate: LPs will increasingly lead the charge in secondary deals as they seek liquidity.
2. GP-led secondaries will get more complex: GPs will need to bring more structure to their secondaries, likely turning to preferred equity to sweeten the deal.
3. Direct secondaries will focus on real pre-IPO companies: Forget buying common shares in random companies. If they’re not truly IPO-ready, walk away.
4. No more dumb money: The days of clueless investors flooding the market with cash are over. The smart players are now in control.
5. Companies will need to structure their secondary rounds wisely: For the best firms, I mean the one that are actually worth something, they must manage these rounds strategically to retain top talent, following the model of "company-led secondaries." Here is the white paper we made on the matter: https://www.insight.bryangarnier.com/demystifying-company-led-secondaries

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Secondary Market Advice: 3 Key Bricks

1. Direct Secondary (15% of the Market):
2. Definition: When an investor sells a stake in a specific company.
3. • Seller Advice: Respect market pricing and swallow the bitter pill of lowering your NAV. Gather data, be transparent, and avoid clinging to outdated valuations.
   • Buyer Advice: Never buy without due diligence. Last-round valuations are ancient history—price your waterfall and assess the returns and risks clearly.
   • Who’s Buying?: Growth funds, pension funds, and family offices—serious players looking for discounted, strategic assets - All the big secondary deals were led by Coatue, Tiger, OTPP, BNF, Macquarie or Mubadala.
4. GP-Led Secondaries (35% of the Market):
5. Definition: Deals driven by the GP, like continuation funds or preferred equity sales.
6. • Seller Advice: Decide between hitting carried interest or focusing on long-term fund metrics. Investors price your fund differently than your internal forecasts. Lack the right metrics? You’ll be left behind.
   • Buyer Advice: VC portfolios are tough to price, but exotic structures like continuation funds or pref equity can mitigate risk. Focus not just on DPI but on the GP’s ability to deliver exits in the next 3–5 years.
   • Who’s Buying?: Secondary funds, Cross Over Fund, family offices, and pension funds are the big players here - HarbourVest just led a huge one in Europe
7. LP-Led Secondaries (50% of the Market):
8. Definition: LPs seeking liquidity are driving most of the action. By FAR the most liquid part of the secondary market - Why? Because Venture Capitalists are not in charge of the secondary valuation..
9. • Seller Advice: If your LP wants out, help them. Provide transparency to minimize the discount and potentially find new LPs to upgrade your base.
   • Buyer Advice: Don't over-rely on NAV—VCs often don’t price in the full waterfall. Invest in funds where the top performers are companies you know and can evaluate independently.
   • Who’s Buying?: Secondary funds, family offices, and pension funds looking to scoop up discounted assets. The size of LP stake can range from $300k to $50m, so the map of investor is really wide.

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Conclusion

So there you have it! All these predictions come straight from our deal flow, deep dives with investors, and countless conversations with clients and LPs.

The good news?

The market’s finally finding its stride, with everyone gradually aligning on price. But let’s not get too cozy—there’s still some serious restructuring ahead before we hit smooth waters.

We're always up for a chat—let’s hear your take on the secondary scene. Whether you’re holding, buying, or selling, we’d love to compare notes!

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