Investors Meeting the Moment for Late-Stage Private Equity
By Glen Anderson, Rainmaker Securities Co-Founder and CEO
More than a decade ago, the market for late-stage private equity took shape. During the recovery from the financial crisis in 2009, investors began searching for strategies to achieve outsized returns and found that opportunity in late-stage private equity, primarily amongst a growing swath of tech and social media companies. They realized that by accessing the steepest part of these companies’ growth curve, they could reap outsized rewards versus investing at the public listing.
Early on, the private securities market was extremely nascent. Venture funds made up an overwhelming majority of buyers in the market. Now, late-stage private stock trading maintains institutional favor, but has begun to attract a global set of high-net worth investors (HNWIs), family offices, hedge funds and institutions.
What’s attracting buyers?
The fundraising boom in 2021 created a record number of unicorns, a crucial development for a healthy contingent of private investment opportunities. Across geographies, the swift rise in interest rates cooled fundraising for the better part of the last two years, and as a result, valuations adjusted to the downside. With the IPO window having been effectively closed and M&A activity halted for the better part of the past two years, shareholders — primarily employees and early investors — flocked to the secondary markets seeking liquidity.
As the principles of supply and demand dictate, valuations of private shares fell as the flood of sell-side orders far outpaced buy-side orders, creating an attractive entry point for new investors. Recognizing the opportunity to own shares of high-quality companies at more accessible prices, more investors began due diligence into the asset class and looked to diversify portfolios with private securities allocations.
For all parties involved, the recent spike in buy-side participation has been timed perfectly, aligning with the NASDAQ already posting a record closing high in July 2024 and falling yields on US 10-year treasury notes. Coupled with a stable rate environment in the US, private valuations are beginning to rebound. What’s more, because private securities lag public equities, late 2024 into 2025, following election year uncertainty, is poised to be an advantageous deal environment.
Private secondaries are predicated on liquidity, and buyers are hopeful that returns are in sight as a backlog of companies that previously shelved IPO plans eye debuts. Meanwhile, companies have their own liquidity needs to address. With companies like Reddit and Klaviyo hitting public markets with positive reception and underwriters expected to price IPOs for early pop and strong initial earnings, as Arm evidenced in 2023’s biggest IPO, the year ahead could provide meaningful momentum towards near-term liquidity for buyers and shareholders alike.
Advisors’ Role in the Private Secondary Market
Private securities are an asset class with less available data than the public equities or fixed-income segments of the market. Research and due diligence capabilities have never been a problem for the well-capitalized funds which dominated the space for more than a decade, but global HNWIs face a steep barrier to comprehensive analysis. To bridge these information gaps, new market participants are engaging with advisors who possess the right experience and deep industry relationships to vet and execute these types of deals. Further, engaging with independent market specialists, such as those at Rainmaker Securities, allows for personalization necessary to navigate the private secondary market, which still remains unstandardized.
The importance of an advisor relationship cannot be understated. Unlike trading equities or commodities on an exchange, private companies have vastly more complex processes and conditions to complete trades, largely due to differences in governance structures, how shares are granted and how certain blocking rights could have been negotiated. Therefore, investors interested in private securities trading have incentive to place trust in advisors and broker-dealers who can negotiate with shareholders and have longstanding relationships with companies’ general counsels and boards, to optimize trade execution.
For their part, trading platforms and brokerages specializing in private secondary markets are adapting to make trading more accessible for qualified investors. To leverage our robust network of independent broker-dealers, we’ve made a conscious effort to invest in our own tech platform, RainmakerX, to create efficiency in a historically inefficient market, by streamlining communication and order matching. We deliver the same emphasis on digitization in our clients service through heightened open access to trading history, research on securities and market trends, serving as a centralized point of control for those making their initial foray into secondary markets.
Globalization on the Rise
On an increasingly international scale, investors see private securities as a strong alternative strategy to unlock potentially high yields, diversifying from the traditional approaches of their competitors. Especially at a time in which global markets are unequally feeling impacts of continued inflationary pressures, higher interest rates and geopolitical impacts are driving investors to new shores.
Despite strong performance recently from the Nikkei 225, Japan’s near-term risk for a recession has clouded a once clear growth proposition in Japan and across APAC more broadly. As a result, yield-seeking investors in Asia are increasingly market-agnostic and enticed by high-growth opportunities overseas, especially in the US.
Simultaneously, UK investors have trended away from domestic markets in favor of riskier international investments with the promise higher returns. Over the past year, UK retail investors have been making bets that the Federal Reserve will begin cutting interest rates in 2024, following the Europe Central Bank’s decision earlier this year, therefore lifting valuations and turbocharging the IPO market. The nearly £12 billion worth of withdrawals from public equities listed in London has stunted growth within the FTSE 100, which offered a modest 2.4% return in 2023, compared to double digit returns from other leading global indices.
And while various macro factors can impact how private companies are traded, their status untethered to an exchange dampens risk correlations to their home market. For instance, while investors are wary about Chinese equities amidst recent stock market selloffs, Chinese company ByteDance continues to see strong private trading inflows across all categories of investor.
Much like the companies traded, the market for late-stage private secondaries has a tremendous amount of growth and maturation ahead. New entrants have fueled a healthy buyers’ market, reaffirming that trading is steadily evolving and should continue to do so. Advisors should understand the potential value of private market investment and be prepared to provide strategic guidance for clients to participate now and into the future.
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.
This communication is confidential and is addressed only to its intended recipient. This communication does not represent an offer or solicitation to buy or sell Securities. Such an offer must be made via definitive legal documentation by the seller of securities.