As enterprise capital has matured, rising 5x over the past 12 years to $350 billion, the dimensions of personal holdings has by no means been higher. With the exit markets quiet and with each regulatory and market forces bringing uncertainty, there’s a rise in stress for exits. The VC enterprise is based totally on M&A and IPOs to provide returns. Nonetheless, given the financial volatility, VC corporations might want to entry the secondary market to thrive on this subsequent financial period.
Enterprise capital buys shares in an organization and holds them, sometimes for eight to 12 years. Sooner or later, nonetheless, the agency should promote its shares. Generally, that happens when a strategic acquirer buys them or when an organization goes public and public market traders purchase them.
However a enterprise agency may promote these shares to a different VC agency or a fund raised to purchase most of these shares. Within the final two or three years, billions have been raised to pursue this.
View this interactive chart on Fortune.com
VC parallels to personal fairness
This evolution within the enterprise capital market parallels personal fairness’s historical past, and VC may benefit from taking a web page out of PE’s guide—or threat shrinking the asset class. Non-public fairness was a cottage business within the Seventies, throughout KKR’s preliminary leveraged buyout years. It remained so for a few decade till Michael Milken’s junk bond bonanza catapulted the market to contemplating even bigger buyouts. Chronicled in Barbarians on the Gates, the RJR Nabisco buyout (value $64 billion in 2025 {dollars}) marked the top of the jumbo buyout period.
The PE business additionally matured by segmenting decrease mid-market, mid-market, and bulge-bracket corporations. The decrease mid-market corporations purchase, maintain, and enhance an organization for a number of years, after which promote it to a bigger firm, and so forth. This sample has produced constant returns and liquidity. There are about eight secondary funds, the most important of which is value greater than $22 billion: an asset class of its personal.
The key distinction between enterprise capital and personal fairness, which may derail VC’s future potential to generate returns through secondaries, is that complete loss happens often in VC corporations’ portfolios. This has improved since 2001, when the capital loss ratio was about 50%. Now the loss ratio for VC is about 20%—however within the case of personal fairness, that is a uncommon incidence. How would a purchaser worth an organization or a portfolio that would conceivably go to zero? To not point out that almost all personal fairness firms produce money, and almost all VC-backed startups produce losses. Additional complicating valuation, no surprise VC secondaries traded, on common, at a 40% to 60% low cost to the web asset worth (NAV) in 2024.
Important secondaries additionally affect underlying portfolio firms. Because the Jobs Creation Act of 2004, startups have been required to worth their frequent inventory to cost choices. It is a determine often known as the 409A valuation for the clause that requires it. Important secondaries executed by insiders can alter that worth, which may have optimistic or unfavorable impacts on the strike worth at which staff acquired choices. Greater strike costs imply much less upside for brand new staff.
Maturity of the asset class
Enterprise capital secondary exercise is almost equal to the personal fairness market already, a dynamic that is solely been current since 2023. Ought to the exit markets proceed to endure a scarcity of liquidity, VC secondaries will turn into an more and more essential exit path for illiquid personal positions.
As personal unicorns proceed to exceed 1,000 in depend (a rising herd), and the traditional liquidity markets stay comparatively closed, we should always count on enterprise capital secondaries to develop considerably. Distributed income from VC corporations will probably be a distinguishing hallmark of VC corporations that proceed to boost capital in these lean exit markets.
This rise of VC secondaries isn’t merely a tactical shift to navigate a constrained exit setting; it indicators a maturity of the asset class. We’re witnessing a segmentation of liquidity choices, a diversification of methods, and the emergence of a devoted secondary market able to sustaining returns even amidst main market headwinds. In different phrases, the VC corporations that adapt to this development will win.
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This story was initially featured on Fortune.com
