Navigating Secondary Transactions: Opportunities and Pitfalls for Private Market Issuers
VerifyInvestor.com
Understanding Secondary Markets and How They Work
For securities, there are two types of markets: the primary market and the secondary market.
The primary market is the place where securities are first issued by various companies or the government, and are then sold directly to investors, to raise capital for growth or to support various company projects. Only new or previously unissued securities are sold in the primary market.
The secondary market, on the other hand, is where investors and traders go to buy and sell securities among themselves. These are securities that were issued and purchased in the primary market. However, instead of selling their interests back to the company that issued them (i.e., the issuer), secondary markets allow investors and traders to sell their securities among themselves. Two of the most recognizable secondary markets are national exchanges: the New York Stock Exchange and the Nasdaq.
For investors in the private equity (PE) sector, the secondary market is key. One main reason for this is that secondary markets provide liquidity for what are commonly illiquid assets. Unlike other investments, private equity investments must be held onto for a number of years — often, 10 or more — before an investor can exit, making PE investments illiquid. Secondary markets allow investors who may want to get out of an investment early to sell their interests before the end of the life of the fund. In this way, investors can gain liquidity and the ability to diversify their portfolios.
In addition, secondary markets support the participation of smaller investors in secondary transactions during the lifetime of a fund. Individual and smaller investors cannot participate in primary market transactions because issuers in the primary market are looking for institutional and high-net-worth investors who can buy a lot of securities all at once. Since the secondary markets comprise individual investors and traders, it means that even smaller investors can participate in exchanges.
So, how big is the PE secondary market?
Well, what was once considered to be an alternative investment “niche,” has evolved into a market that exceeded $152 billion dollars in 2024. By 2025, experts believe it will reach the $175 billion dollar level. Since its initial emergence around 50 years ago, the private equity secondary market has grown to the point where it is now viewed as a “mainstream pillar of the private equity landscape.”
PE Secondary Market Transaction Structures
Often referred to as “secondaries,” there are basically two types of private equity secondary transactions:
transactions led by a Limited Partner (“LP-led transactions”), and
transactions led by a General Partner (“GP-led transactions”).
How each transaction is specifically structured depends on a number of different factors and is beyond the scope of this discussion. Generally speaking, however, in LP-led transactions, one investor sells its entire stake in a larger fund to another investor. The purchasing investor takes over the seller’s interests completely — liabilities and all.
In GP-led transactions, the general partner or fund manager sells all or part of the fund to a secondary investor. The secondary investor can be a new investor or investment vehicle. When an entire asset or portfolio company is transferred from one vehicle to another, the GP-led transaction is referred to as a “single-asset continuation transaction.” In these types of transactions, the investors in the fund may either exit by cashing out, or they can invest in the new fund.
Single-asset GP-led transactions have grown significantly over the years and continue to be one of the fastest-growing areas within secondaries.
Private equity secondary markets allow GPs to create liquidity for investors. For LPs, the secondary markets assist in creating liquidity and portfolio diversification. LP-led secondaries primarily grew out of the desire of investors to increase liquidity and take an active role in portfolio diversification. In contrast, GP-led transactions were primarily fueled by innovation and the need to create liquidity for investors.
Secondary markets have become a mainstream portfolio management tool for both LPs and GPs. And their popularity will not be slowing down anytime soon. Secondary markets are a key part of the investment landscape and are expected to continue to grow and expand over the next few years.
The Impact of Secondary Market Securities Regulations on Investment Valuations, Investor Relations, and Long-Term Strategy
Regulations play a key role in managing investor risk in the secondary markets. Like other securities transactions, private equity secondary transactions are subject to the securities laws and the rules and regulations promulgated by the Securities and Exchange Commission (SEC).
The laws and regulations provide the framework for protecting investors while at the same time defining market stability and fair pricing. Laws and regulations applicable to secondary markets influence how investments are valued and shape investor relations and long-term strategy. In particular, regulatory changes governing secondary markets influence investment valuations for tax and financial reporting purposes.
Regulations also influence long-term strategy. For example, restricted securities cannot simply be bought or sold on the secondary market. They must first either be registered with the SEC or meet a valid exemption. Unrestricted securities — generally those offered by an issuer pursuant to a regulatory exemption — can be traded on the secondary market. These requirements can greatly influence investment decisions.
Further, stricter regulations and increased regulatory oversight of transactions have changed how issuers do business. Companies are now required to put more internal controls in place to meet compliance requirements and increase investor protection. In turn, these changes influence investor relations and long-term strategy.
The private equity secondaries market serves as a new compliance tool for institutional investors, such as banks. As a result of new regulations, banks — often major investors in private equity — are now required to set aside reserves to cover their losses from these investments. Through LP-led transactions, banks can offset their losses by selling existing fund stakes to other investors.
Despite its many advantages, the secondary market does have its challenges. In particular, transparency is a problem. This is because private equity deals are generally only open to accredited investors or institutional investors, and are not subject to the same disclosure requirements as publicly traded investments. As a result, investors must carefully and fully analyze each opportunity.
Finally, because this is a highly complex area, investors should engage the assistance of competent professionals to assist them in their analysis and decision-making.
Can Issuers Secure Compliant Liquidity Events for their Investors?
Providing liquidity for investors while remaining compliant with the SEC regulations can be a challenge. However, the secondary market is a way for issuers to secure compliant liquidity events for their investors. The private equity secondary markets offer issuers several avenues for providing liquidity to their investors, including:
continuous automated trading,
auctions, and,
block trades.
Modern technology has made it possible to create creative and compliant systems that facilitate secondary trading. An excellent example of a digital asset platform is VerifyInvestor.com’s majority owner, tZERO Group. tZERO and its broker-dealer subsidiaries provide an innovative digital asset liquidity platform for private companies and assets. One of the few regulated and licensed venues that supports secondary trading for traditional securities as well as digital securities utilizing the blockchain, tZERO is able to offer issuers continuous secondary trading after a primary capital raise.
One of tZERO Group's broker-dealer subsidiaries has recently received regulatory approval from FINRA to facilitate secondary trading in corporate debt securities on its alternative trading system (ATS).
Whether it is a primary investment or secondary trade, complying with the securities laws is critical for both issuers and investors. The securities laws touch on a vast number of financial and investment issues of importance to all investors and issuers. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services (which also include AML/KYC checks, qualified purchaser, and qualified client verification) are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.