State of Late-Stage Secondary Dealmaking: A Q&A with Rainmaker Securities CEO
Glen Anderson, Rainmaker Co-founder and CEO, details how evolving macro dynamics, market participation, and investor priorities have shaped the secondary landscape – and the opportunity ahead for dealmakers.
How has investor sentiment evolved in the late-stage private secondary market in recent years?
The past several years have been a rollercoaster.
2021 was a record-setting hot market. Buoyed by a string of sizable tech IPOs and a boom in private fundraising, we saw valuation spikes for nearly all late-stage private companies that raised money. As a result of this growth, buyers flooded the market, creating one of the most opportune secondary markets for liquidity. In 2022, investors pivoted substantially, as access to capital dried up amid interest rate hikes and dips in public comps negatively impacted private valuations of companies struggling to grow into the lofty fundraises of the year prior.
Cautious optimism fueled a transition year in 2023. Once interest rates began to plateau in May and investors saw signals of a public market rebound, buyers returned to the secondary market, finding more value within high-quality companies still deflated from the year prior.
Now, in 2024, private secondary markets have reached a sustainable equilibrium with investor confidence for continued growth ahead.
We’ve landed in a place in which investors once again see the upside potential in late-stage private securities. Rainmaker has seen buy order volume continually trending upwards since November 2023, following the solid public debuts of Arm, Klaviyo and Instacart, and steadily increasing by more than 47% through May 2024.
What factors have driven the uptick in activity?
First and foremost, growing confidence in the IPO market is driving interest in late-stage private companies.
2023’s biggest IPO, Arm, posted very strong first earnings in Q4, and is currently trading well north of 50% above its first trade. To keep those strong trendlines, we’re seeing bankers price IPOs conservatively, creating room for companies to pop in their debuts and stay steady above initial trades. This year’s most visible IPO to date, Reddit, was emblematic of that stability, pricing at the top of its range and continuing to trade above that level.
Particularly for tech companies, there has been a rebound in listed equities and rising share prices for public comps, equally boosting private securities. The S&P 500 gained just north of 10% in Q1 this year and the Nasdaq Composite followed suit with its first record high since November 2021.
Equally important, we have a strong contingent of companies garnering investor interest. The market downturn in 2022 led to a contraction of companies seeing bids. Though the breadth of those names hasn’t quite recovered, we’ve seen the deca-corns maintain interest from investors almost without exception. Similarly, the ‘fear of missing out’ on generative AI companies presents a natural draw for the private markets, where companies like Anthropic, Figure, OpenAI, xAI and Cohere are among investor favorites.
Which companies are driving the most deal flow on the Rainmaker platform?
With venture capital firms hesitant to deploy new capital and an ongoing emphasis on profitability, we’ve seen the breadth of traded names compress to a much narrower pool. Though fewer names are trading, they are notably high-quality companies which are positioned well for the long-term.
The companies receiving the most buyside interest in 2024 have been SpaceX, Anthropic, Databricks, Unrivaled, Stripe and Anduril.
Who are the investors leading the deal activity for private secondaries?
Not only have buy orders picked up in the past year, but the breadth of buyers has expanded and diversified. This is encouraging for the market as a whole, as broadening participation is a signifier of a natural, healthy maturation within the dealmaking landscape.
This maturation has brought into the fold a new wave of high-net-worth investors and family offices, augmenting the swath of institutional funds which have long comprised the buyside of our market. Beyond placing direct trades, high-net-worth individuals are increasingly participating in special purpose vehicles to pursue additional deal-making opportunities and increase their allocations towards private investments.
This is a global shift. Across geographies, these buyer categories are looking to increase allocations to late-stage private securities. With M&A and fundraising making the biggest comeback in the US, buyers from APAC, Europe, and the Middle East, in particular, are viewing venture-backed US companies as alternative investments with high growth potential.
What do you expect in the second half of the year?
The IPO market has given us a successful trickle of listings, which we believe will reflect itself in an uptick in private securities dealmaking. Historically, completing deals at an increasing rate, as we are now, signals investor confidence that quality companies will go public in the near- to mid-term.
IPO investors are typically the same investors we see coming into private securities, searching for a wider margin upon the IPO’s debut. If these ‘pops’ continue, H2 in 2024 could be an exciting period, luring mega-cap names and extremely sound companies to the public markets. AI companies, Stripe and Databricks, all of which are among the highest valued companies on our platform, certainly seem to fit the bill if that’s the case.
With relatively stable market conditions and the excitement of AI developments, we expect investors will be willing to buy growth over profitability in the months ahead, provided each company’s underlying unit economics are on strong footing.
Has early M&A activity impacted what’s to be expected for private secondaries?
Unlike private secondaries, deal flow has remained consistent from 2023 into this year, an encouraging sign for investment bankers looking for stability. That said, multiples remain between 15-20% down from all-time highs in 2021, though many believe that the valuation reset has passed, Market optimism persists given current multiples are sitting at a small fraction below pre-pandemic averages.
Like trading in private secondaries, the rebounds in M&A have been buttressed by higher-valued deals. Highlighted by CapitalOne’s acquisition of Discover Financial, North American markets have driven global M&A, with the top ten deal flow increasing 54.6% year-over-year to come just shy of $190 billion in Q1[1]. We believe this has the potential to continue through the rest of the year as IPO conditions in London remain rockier than in the US, and the exit environment more constricted across Europe.
In Conclusion
Armed with an understanding of the trends which are shaping the current market, skilled dealmakers can harness investor optimism, among many demographics of investors, and capture deal-flow momentum in a stabilizing market.
Rainmaker Securities, LLC (“RMS”) is a FINRA (FINRA.org) registered broker-dealer and SIPC (SIPC.org) member. Find this broker-dealer and its agents at brokercheck.finra.org. Our relationship summary can be found at rainmakersecurities.com/disclosures.
RMS is engaged by its clients to make referrals to buyers or sellers of private securities (“Securities”). If such client closes a Securities transaction with a buyer or seller so referred, RMS is entitled to a success fee from the client. Such success fee may be in the form of cash or in warrants to purchase securities of the client or client’s affiliate. RMS or RMS representatives may hold equity in its issuer clients or in the issuers of securities purchased or sold by the parties to a transaction.
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[1] https://files.pitchbook.com/website/files/pdf/Q1_2024_Global_MA_Report.pdf