As 2024 wraps up, year-end performance metrics for your portfolio companies are crystal clear. If you're holding onto strong-performing companies in Series C, D, E, or beyond, it’s time to consider how secondary liquidity can play a crucial role in your portfolio harvesting strategy. Selling secondaries isn’t just about freeing up cash—it’s a strategic move to return capital to LPs, particularly valuable if you’re planning to fundraise soon. With TVPI, DPI, and MOIC as key performance indicators, secondary sales can significantly enhance your fund’s financial profile.

Why Secondaries Should Be Part of Your Portfolio Strategy

Secondary sales provide a unique opportunity to unlock value from mature holdings without waiting for a full exit. For funds approaching a new fundraising cycle, demonstrating strong DPI through realized returns can be a game-changer. By selling a portion of your equity in high-performing portfolio companies, you can return capital to LPs, showcase successful exits, and improve your fund’s overall metrics.

Navigating the Secondary Process

Selling secondaries isn’t without its complexities. The process can be tedious, requiring careful navigation through multiple stages:

1. Right of First Refusal (ROFR): Many co-investors and existing stakeholders have ROFR clauses, giving them the right to match any external offers. This can add layers of negotiation and prolong the process.
2. Due Diligence and Information Rights: External buyers will demand access to financials, board minutes, investor presentations, and other critical documents. This transparency is essential for accurate pricing but requires careful coordination to protect sensitive information.
3. Pricing Challenges: For companies in Series C and above, pricing dynamics can vary widely. If your portfolio company’s shares are already trading actively in the secondary market, pricing tends to follow established market ranges, often influenced by recent funding rounds, comparable company valuations, and investor sentiment. In these cases, secondary shares typically trade at a discount of 10% to 20% relative to the latest primary round valuation, depending on liquidity and market demand.
4. However, for unique, highly successful companies with less trading history—often those with disruptive business models or operating in niche markets—negotiations can become more complex. Buyers typically seek discounts ranging from 20% to 30% to compensate for liquidity risks, lack of control, and potential information asymmetries. That said, if the company demonstrates strong, consistent growth metrics, robust unit economics, and clear paths to profitability, these discounts can narrow significantly, sometimes falling below 15%. Conversely, companies with less visibility, operational risks, or market volatility may face steeper reductions, exceeding 30%.
5. For Series D and beyond, where companies are often on the cusp of an IPO or major acquisition, pricing can be more favorable. These later-stage companies usually have more predictable revenue streams, larger market footprints, and established governance structures, reducing perceived risks for secondary buyers. As a result, discounts may shrink to 5% to 10%, especially if the company is in a "hot" sector like AI, fintech, or healthcare technology, where investor demand outpaces supply.
6. Another key factor influencing pricing is the competitive landscape. If your portfolio company operates in a highly competitive market with multiple comparable exits or public market peers, pricing negotiations tend to be more straightforward, anchored by existing benchmarks. However, if the company’s growth trajectory is unparalleled or its market position is unique, buyers may push for steeper discounts due to the absence of clear comparables.
7. Finally, the timing of the secondary sale relative to funding events plays a pivotal role. Selling immediately after a successful funding round can command premium pricing, as the recent valuation provides a strong anchor. Conversely, attempting to sell before an anticipated funding round might lead to deeper discounts, as buyers factor in potential dilution and valuation uncertainties.

Timing is Everything

The timing of secondary sales significantly impacts pricing and demand. Selling shares immediately after a successful funding round can attract premium pricing due to heightened investor confidence. Conversely, selling just before a new funding round might lead to deeper discounts, as buyers anticipate potential dilution or shifts in valuation. Additionally, secondary buyers often prefer a portfolio of opportunities—three to five logos—rather than a single company, which helps them diversify risk and enhance their investment thesis.

The Process Timeline

Expect the secondary process to take between three to six months. It involves securing internal approvals, navigating ROFR clauses, identifying and engaging buyers, facilitating due diligence, negotiating terms, and finally closing the transaction. The process’s duration and complexity underscore the importance of strategic planning and expert guidance.

Maximizing the Impact of Secondary Sales

For venture funds, secondary sales are more than just a liquidity event. They are a powerful tool for portfolio optimization and capital management. By strategically timing and structuring these transactions, you can:

• Enhance Fund Performance Metrics: Boost DPI, improve MOIC, and strengthen TVPI to attract new LPs.
• Return Capital to LPs: Demonstrate your ability to realize gains and manage liquidity effectively.
• Prepare for Fundraising: Showcase successful partial exits to build credibility and momentum for your next fund.

Secondary sales can unlock significant value, but the process requires precision and expertise. From navigating ROFRs and due diligence requirements to pricing and timing strategies, each step plays a critical role in maximizing returns. I can help guide you through this complex landscape, ensuring that your fund’s secondary transactions align with broader strategic goals and deliver optimal results.

Let’s reconnect.

Tom C. Schapira
Founder and CEO
Imagine Capital Group
E: tom@imaginecapitalgroup.com
Website: http://www.imaginecapitalgroup.com