Introduction

In the traditional vision of venture capital, investments are long-term, illiquid bets: business angels, limited partners (LPs), and VCs commit capital, ride the growth curve, and hope for a generous exit via an IPO or acquisition. Yet, as the private markets evolve — and as many companies remain private far longer — a parallel and often opaque world is gaining traction: the secondary market for VC stakes. Once a niche backwater, secondaries are now being hailed as a “secret weapon” of liquidity, offering a powerful alternative to the binary win-or-wind-down model of traditional VC investing.

But this emerging market is not without controversy. Are these secondary deals democratising access, or do they pose risks to transparency and alignment? And how should different actors — founders, LPs, business angels, and fund managers — navigate this terrain? In this article, I aim to shed light on how secondaries work, why they matter, and what the debate around them really means.

1. What Exactly Is the VC Secondary Market — And How Does It Work?

To ground our discussion, it helps to define what we mean by “secondary market” in the VC context.

In private markets more broadly, secondaries refer to the buying and selling of existing interests in illiquid funds or portfolios — not new fundraising.  

In venture capital specifically, secondaries can mean either:

1. LP-led secondaries: an existing investor in a VC fund (an LP) sells all or part of their commitment to a new investor, who takes over both the rights (future distributions) and obligations (remaining capital calls).

2. GP-led secondaries (continuation vehicles): the general partner (GP) of a fund rolls one or more portfolio companies into a new vehicle, offering liquidity to some LPs while new or existing investors buy into the continuation.  

3. Direct secondaries: shareholders in a private company — founders, early employees, earlier investors — sell their actual equity to a buyer outside the primary funding rounds.  

Why is this becoming more common in VC today?

• Startups are staying private for longer, stretching fund lifecycles.  

• Traditional exit routes (IPO, M&A) are becoming less predictable or more delayed, pushing investors to find alternate liquidity.  

• Secondary funds (specialised buyers) are raising increasing amounts of capital to buy these stakes.  

From a mechanics perspective, pricing in these deals is typically negotiated: it’s often a function of the net asset value (NAV) of underlying assets (for fund interests) or negotiated on a case-by-case basis for direct secondaries. And although transfers often require GP consent, these transactions have become far more sophisticated over time.  

2. Why Are Secondaries Gaining Traction — The Power and Appeal of Liquidity

The rise of the secondary market is not just a theoretical curiosity. It reflects a profound shift in how capital behaves, and what investors want from VC.

(a) Liquidity for Long-Locked Capital

VC investments have always been relatively illiquid. But for LPs wanting to rebalance their portfolios or free up capital, secondaries offer a pragmatic exit — without waiting for a full realisation via IPO or M&A.  

Similarly, for founders and early employees, direct secondaries allow partial realisation of value, enabling them to monetise some of their equity before an exit event.  

(b) Reinvestment, Recycling, and Fund Metrics

When GPs use secondaries, they can recycle capital: proceeds from secondary sales may be reinvested into new opportunities, boosting fund IRR (internal rate of return) and other performance metrics (such as TVPI – total value to paid-in capital).  

Furthermore, continuation vehicles (GP-led secondaries) let managers “reset the clock” on their best-performing assets, giving them more runway to create value.  

(c) Mitigating Traditional VC Risks

From a buyer’s perspective, secondaries may reduce some of the early-stage risk associated with primary VC investments. In a secondary fund, the underlying companies may already have some maturity; the “blind pool” risk is lower.  

Also, because many of these funds have already deployed most of their capital, the dreaded J-curve (initial negative cash flow) is less pronounced. Secondary investors often receive distributions sooner.  

In short, secondaries align incentives in interesting ways: sellers get liquidity, GPs get flexibility, and buyers get exposure to mature, potentially high-quality private companies.

3. Risks, Criticisms and the Debate Around Transparency

Despite the advantages, the secondary market is not without controversy. As with any growing financial phenomenon, questions arise.

(a) Opacity and Information Asymmetry

One of the chief critiques is that the secondary market may undermine transparency. Because many secondary deals are privately negotiated, they occur “off-market” — there is no central exchange, and pricing terms are rarely made public.  

Unlike public stock markets, where every trade is (in principle) visible, secondaries happen in bespoke bilateral deals, and the selection of buyers can be restricted by the GP.  

This opacity can raise concerns: are all LPs treated fairly? Are founders or minority shareholders disadvantaged? Does the lack of standardisation lead to unequal power dynamics?

(b) Alignment and Incentives

Continuation vehicles can be powerful, but they also raise questions about alignment. For example: if a GP spins out a “trophy” startup into a new fund, do existing LPs feel compelled to reinvest? Do they have a genuine choice, or is there pressure to roll into the new vehicle?  

There is also the risk that GPs may focus on “star” companies rather than managing the full portfolio. That can create a two-tier system in which only the winners get the benefit, leaving other holdings underfunded or neglected.

(c) Valuation Risk and Price Discovery

Because there’s no public pricing mechanism, negotiating the “right” price can be tricky. Sellers may demand a premium, while buyers argue for a discount. Valuations often rely on the fund’s reported NAV, but that figure may itself be based on internal estimates rather than market-tested valuations.  

Furthermore, as secondaries become more popular, competition for high-quality assets increases, which may compress discounts – potentially reducing the return for secondary buyers. Indeed, record volume in 2024 has been reported.  

(d) Governance and Regulatory Concerns

Finally, there are governance and regulatory questions. Because secondaries are negotiated privately, issues around co-sale rights, information rights, and governance can be complex. Some deals may favour insiders or large, well-connected investors.

On the regulatory front, private markets remain less regulated than public ones, which means less public disclosure and fewer investor protections — potentially making these deals less “open” than proponents suggest.

Conclusion: Navigating the Secondary Market — Tips for Different Stakeholders

The secondary market in venture capital is increasingly a force to be reckoned with. It offers genuine liquidity, flexibility, and opportunity — but it also raises real questions about power, fairness, and transparency.

Here are some actionable tips for different players in the VC ecosystem:

I) For Business Angels and LPs Considering Selling

• Evaluate your motivation: Are you selling because you need cash, or because the fund has matured and you see limited upside?

• Understand your rights: Before engaging in a secondary, check whether you can roll into a continuation vehicle and what information you’ll retain.

• Negotiate diligently: Try to benchmark any secondary offer against NAV-based valuations, and understand how your buyer values the underlying companies.

II) For Founders and Early Employees

• Advocate for structured liquidity: If secondary opportunities arise, push for a fair and transparent process. Ask for board approval, valuation rationale, and equal treatment for all shareholders.

• Manage dilution: Be aware that secondary buyers may negotiate terms that affect option pools, governance, or future funding rounds.

• Educate yourself: Understand what a continuation vehicle is and whether reinvestment by existing investors could impact your cap table or alignment.

III) For GPs and Fund Managers

• Design secondaries strategically: Use GP-led secondaries to optimise capital recycling, preserve winners, and offer optionality to LPs — but don’t force reinvestment.

• Communicate clearly: Provide transparent NAV reports, valuation methodology, and governance terms to LPs considering a roll or exit.

• Build trust: Work with reputable secondary buyers, and design mechanisms that ensure alignment (e.g., co-investment, information rights).

IV) For Secondary Buyers (Funds or Individuals)

• Do deep due diligence: Analyse the underlying portfolio, the valuation history, and any fund-level risks (e.g., remaining capital calls, concentration).

• Structure deals smartly: Negotiate deferred payments, reference dates, or earn-outs if needed to mitigate valuation risk.

• Think long-term: While secondaries offer earlier cashflows, they are not risk-free: alignment with GPs and exit pathways must be carefully considered.

In short, the secondary market is not a mystical backdoor — it is becoming an integral part of modern venture capital. Far from undermining traditional structures, it may well strengthen the ecosystem by offering flexibility and choice. But for it to be a healthy force, all actors must engage thoughtfully, transparently, and with their eyes wide open.