Investing in secondary markets has soared in recent years. Like a little-known indie band that just made it big on TikTok, private secondary markets are all the rage.
In this article, we'll look at what they are, how they are changing modern investing, and how qualified investors can access them.
For existing private equity holders, the rise of secondary markets has provided some much-needed liquidity. And for qualified investors who want to diversify and include private companies in their portfolio, learning how to invest in secondary markets could unlock new opportunities.
Broadly speaking, the secondary market is where most of the investment fun happens. It's how investors can buy or sell assets and securities after they've been issued.
One of the best-known examples of a public secondary market is the New York Stock Exchange, which averages nearly $19 billion in trades daily at the NYSE closing auction alone.
In a similar vein, investors can buy or sell privately held companies on the private secondary market.
Before we talk too much more about investing in secondary markets, let's dive a little deeper into the difference between primary and secondary markets.
Primary markets are where securities are created. Primary market assets are issued by the company, which receives the money from the sale. A common example would be when a company goes public via an IPO. It sells shares on the primary market to raise money.
But when those shares get traded out in the wild, they become part of the secondary market. The original company is not involved in future trades and does not get any money from them. Instead, an existing shareholder sells their stake to another investor and pockets the cash.
To put it in non-security terms, let's say you are the 21st-century Van Gogh. (It's okay. You can keep both ears.)
You paint Starry Night Redux. It goes viral on Instagram. You sell it to a billionaire art collector. He reaches out anonymously through a mysterious middleman, but you’re pretty sure it’s Jay-Z. That's a primary market transaction.
But Jay-Z being Jay-Z, he’s bound to flip it for a profit. (After all, he is a business, man.) So he auctions it off for ten times what he paid. That’s a secondary market transaction. So are all the trades that take place after that.
The creator doesn't have anything to do with secondary market sales. The seller receives the proceeds from the transaction — and perhaps eventually writes some fire bars about them.
Secondary markets are crucial to investors of all stripes because they provide liquidity. This makes it easy for both retail and institutional investors to buy and sell assets. Investing in the secondary market is more transparent than the primary market, allowing for more informed price decisions.
For retail investors, investing in secondary markets gives access to opportunities that might otherwise be restricted. This is particularly true as investing in private equity and pre-IPO shares becomes increasingly accessible.
The stock market is one of the most visible examples of investing in secondary markets. But it's far from the only one.
You can trade almost anything on a secondary market. That includes bonds, derivatives, alternative investments, commodities, and more. For some time, however, you would have had a lot of trouble finding secondary markets for one asset: private equity. Investing in startups was essentially exclusive to venture capitalists, PE firms, and the companies’ employees.
This has since changed dramatically, with the rise of private market secondary platforms like Augment*, which enable everyday investors to buy and sell shares of pre-IPO companies.
According to Jefferies’ latest Global Secondary Market Review, private secondary transactions hit a record high of $162 billion in 2024. That's about 110% higher than it was in 2018. The firm predicts the market will reach over $185 billion in 2025.
One of the main reasons that private secondary markets have grown so much in recent years is that they make a typically illiquid investment a bit more liquid. Fund managers need that liquidity right now, which is making them more creative about their approach to secondary markets.
Private equity fund managers are under pressure from investors who want distributions from their funds. According to CF Private Equity, distributions in 2023 were the lowest they've been in a decade, and with IPO and M&A activity still dampened, that might not change anytime soon.
Now, these institutional investors are turning to secondary markets for liquidity and portfolio rebalancing. And there may be room for even more growth. BlackRock found that secondary volume accounts for only about 1% of total unrealized value in the private capital markets. The firm sees "significant" potential for continued growth.
It’s not just institutional investors piling into the space. As the private secondary market has grown, technology has risen to the challenge, offering investors new ways to connect. Augment, for example, offers a pre-IPO investment platform empowering accredited investors to get in on the ground level before companies go public. The platform makes it easy to track price history and other data, which can help users make informed investment decisions.
On the seller side, workers or investors who hold stock in private companies have a new way to liquidate their holdings. For example, an early employee in a promising startup might want to buy a house or plan a vacation. Rather than waiting for the company to go public or another liquidity event, they could use Augment’s private stock marketplace to find a buyer, sell some of their shares, and realize their net worth.
That's important because private companies are staying private for longer. Morningstar data shows private companies today wait an average of 10.7 years to go public, which is nearly 4 years longer than a decade ago. Stakeholders may not want to wait so long.
Private equity investments are undergoing a transformation. Qualified investors can now access private investments more easily through platforms like Augment. This opens the door to pre-IPO opportunities that would otherwise be off the table. And, with the potential to increase liquidity and lead to better-balanced portfolios in these uncertain economic times, private secondaries may only become more robust in the years to come. Before diving in, it’s crucial to understand potential risks— learn about mitigating risks in secondary market investments to protect your capital.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.