A secondary transaction, in the context of private equity and venture capital, is the buying or selling of an existing stake in a private company or an investment fund. This happens between investors and does not involve the original issuer of the security.
Secondary transactions can primarily be categorized into two types:
Direct secondary transaction:
This involves the sale of a stake in a private company. The investor selling their shares might be a founder, an employee, or an early investor who wants to liquidate their position before the company has an exit event such as an IPO or acquisition. The buyer could be a new investor who wants to acquire a stake in the company.
Secondary fund transaction:
This involves the sale of a limited partner's interest in a private equity or venture capital fund. The selling limited partner might want to exit the fund due to changing investment priorities or a need for liquidity. The buyer acquires the future cash flows associated with the sold interest.
These types of transactions occur in the secondary market and can provide liquidity for investors who otherwise would have to wait for an exit event or the end of the fund's life to recoup their investment. Secondary transactions also offer opportunities for new investors to gain exposure to assets that are not often available on the open market.
