Market Insight Update: Trimodal Secondary Market Landscape

Upon the onset of 2024, the secondary market has evolved as outlined below.

1)    There are select momentum driven companies (SpaceX, OpenAI, Anduril, Redwood Materials, Hugging Face, Cohere, etc) in the Generative AI and aerospace and defense industries where access to investment opportunities is paramount and there is less emphasis on fundamental analysis. Investor demand significantly outshines available supply. Given that secondary deals are largely blocked in these names and liquidity is limited, investors and sellers can transact via a SPV (Special Purpose Vehicle). SPV terms typically reflect pricing that is at par or a slight premium and can include management fee and carry.

2)    In well established secondary market where liquidity is permitted using secondary transactions such as Flexport, Rubrik, Brex, etc, the forces of supply and demand determine pricing. The lowest seller and the highest buyer end up transacting as the spread between their pricing is the least and both parties would meet in the middle to get the secondary deal completed. As a result, sellers with higher ask prices and buyers with lower bids aren’t going to be able to transact right away. An emphasis on high level fundamental analysis is likely the driver behind bids whereas cost basis and liquidity needs are drivers for ask prices.

3)    In thinly traded secondary names, institutional secondary funds are likely to need access to financials to underwrite on new investment to obtain the exact discount that they would like to pay relative to last round pricing. An emphasis on detailed fundamental analysis will be used here. However, the case in where capital deployment is quite low and where access to financials won’t be permitted, some investors such as SPV managers or individual investors might rely on a heuristic (Ex- 65% discount on crypto names) to arrive at their bid price for a thinly traded secondary names of niche interest.

As such, an investor should consultant an experienced broker dealer such as RainMaker Securities to ensure that they are investing in these growth stage names at a value accretive entry point. Historical pricing along with macro-economic intel and comparable companies analysis should be used in conjunction with broker data to determine if a secondary sale or secondary purchase makes sense.