As private companies stay private longer, early employees and investors are finding the need to turn their paper wealth into actual dollars by selling some of their shares to other investors rather than wait years for an initial public offering.
One investment firm has raised millions more to snap up shares of these aging unicorns.
Bracket Capital, a venture capital firm that focuses largely on acquiring existing shares of later stage companies rather than early direct investments in the businesses themselves, has raised $450 million across its its second fund ($150 million) and co-investment vehicles ($300 million), the company announced Wednesday. Bracket has invested in the likes of Airbnb, Bird, Lyft, Coinbase, and Juul, and raised $200 million for its previous fund.
While the investment firm also acquires shares directly from companies, the duo that founded the investment firm in 2017——Yalda Aoukar and Jihan Bowes-Little—say about 80% of deals are focused on later-stage so-called secondary deals.
The rationale ties back to their respective career histories working in the public markets (Aoukar at Investcorp and Bowes-Little at hedge funds including Bluecrest Capital). While the secondary market in the public sphere is crowded, quite the opposite is true in venture capital, says Aoukar. That dynamic persists even though the venture industry is growing flush with cash, allowing companies to stay private longer. Palantir, for example, famously eschewed a public debut for 16 years.
But the stay-private path is not always an easy one for early employees and investors. While a shareholder may grow ever wealthier on paper with each subsequent private funding round, he or she often struggles to sell or is restricted from selling shares, leaving that wealth inaccessible. Similarly, an early investor or limited partner may require returns before the company is ready to IPO or sell itself.
“The distinction between public and private is blurring,” says Bowes-Little in a phone call. “The financialization of venture capital is how I like to think of it.”
The duo believe that eventually, the secondary market will eventually grow “orders of magnitudes larger than the primary market.”
Bracket is not alone in the belief that secondaries are an opportunity. Industry Ventures for instance working on raising an estimated $750 million for its ninth secondaries fund. At the same time, growth stage funds have been known to snap up shares from their existing portfolio companies, and recently, Sequoia acquired shares of Zapier, an enterprise startup that it previously did not have a stake in, through secondary markets valuing it at over $4 billion.
Though most agree that the VC secondary market remains small compared to that of the private equity market, estimates suggest it has been growing in recent years to meet demand from early investors and employees. New investors such as hedge funds and sovereign wealth funds meanwhile have been eager to buy up shares in unicorns on the verge of going public in secondary markets the hopes of catching the high returns recent tech IPOs have created. Industry Ventures estimated that in 2019, the secondary market value grew to $38.7 billion, up from $29.3 billion a year earlier.
While the majority of Bracket’s deals are in the secondaries realm for now, the duo say they are flexible with flowing between secondaries and primary. The firm also manages a pool of crypto assets and says it manages other assets in the alternative space. But now, they say, is an opportune time to buy on the secondary market when most focus on primary. “There’s way more capital looking for primary than for secondary,” says Bowes-Little. “We think it is an opportune time to focus on secondaries… But the world will shift.”