From IPO to Liquidity: The Evolution of Secondary Markets

The private secondary market has transformed from informal, ad-hoc deals to a sophisticated $3 trillion asset class. In this episode, Jack Cassel, Senior Vice President and Head of Listings at Nasdaq, joins host Tanya Suba-Tang to unpack how private companies, employees, and investors are navigating liquidity needs long before IPOs. 

Discover how companies manage cap tables, why secondary transactions differ from traditional venture funding, and how market sentiment has shaped growth from the post-2008 era through today's innovation boom. 

Whether you're an employee holding private stock, an investor seeking new opportunities, or a finance professional tracking market evolution, this episode delivers the insights you need to understand one of the fastest-evolving frontiers in finance.

If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Chapters

• 0:00 Introduction to Financial Perspectives
• 1:16 Understanding Private Secondary Markets
• 3:57 Historical Evolution Since 2008
• 6:14 Recent Changes and Market Control
• 8:40 Market Trends and Investor Demand
• 11:18 Future Outlook and Growth Potential
• 14:45 Episode Closing and Contact Information

Transcript

Lindsey Helman: 0:05

Hello and welcome to Financial Perspectives, a CFA Society San Francisco podcast where we interview and discuss trends with leaders from across the investment and finance industry. This month, our host, tanya Suba-Tang membership Director with CFA Society San Francisco, had the pleasure of speaking with Jack Cassel, senior Vice President and Head of Listings at NASDAQ. Listen in as they explore the evolution, current trends and future outlook of the private secondary market.

Tanya Suba-Tang: 0:40

Jack, great to have you on our podcast today. Welcome.

Jack Cassel: 0:43

Thank you. Thank you for having me.

Tanya Suba-Tang: 0:45

I am looking forward to our conversation, a conversation I actually have not had. This five Wow can't believe I'm going to say this Our fifth year of our podcast. It's secondary market. So I want to kind of jump in here because, as I said, mentioned before privately, you and me, that we have a global listenership, which is awesome. So, to set the foundation of our conversation, can you share with our listeners the purpose of the secondary market and what types of assets or securities are commonly traded in it?

Jack Cassel: 1:16

Yeah, so you know, specifically speaking to the private secondary market, this really refers to the buying and selling of pre-existing shares of a private company or existing LP positions, say in a venture capital portfolio. So secondaries are different than your typical venture capital investments, otherwise known as primaries, where a company will issue new stock, typically preferred to investors, in exchange for that capital and that capital goes on the company's balance sheet to really support their R&D, their operations, their hiring and fuel that growth. Where, conversely, in a secondary investment or a secondary trade, no new shares are created. So rather the existing shares are purchased and that capital is used to purchase those shares and that goes directly to the seller of those shares Again, most of the time that's long-term time employees or early investors but not to the company.

Jack Cassel: 2:12

So in other words, a secondary transaction is not necessarily a financing event for a company but rather a liquidity event for those select shareholders. And when you think of the purpose really for these secondary liquidity offerings for private companies, it again serves a slightly different purpose in that it's primarily about liquidity and it's really driven by, I'd say, three core needs. So first is just that, employee liquidity. So employees in private companies often receive stock options as part of their comp and having a secondary market allows them to sell some of those shares before a company eventually goes public or exits via M&A or just any broad exit, so that provides them with liquidity. Then two is just again early investor exits. So early stage investors may invest in those angel rounds, seed rounds A, b, where the investors want to realize some gains before a formal exit or an IPO or acquisition. And then the third core need, I'd say, is just sometimes the companies themselves will facilitate these secondary transactions to bring in new strategic investors or to restructure their cap table.

Jack Cassel: 3:27

So it gives them some flexibility to really own who owns the company and the shares, and so if we look back historically, really kind of the origin story of secondary, especially in the private markets.

Jack Cassel: 3:41

It really emerged out of the financial crisis, so kind of post 2008, where companies were delaying IPOs and this really created a need for liquidity among just that kind of employees and early investors. And then we started to really see this take off in the marketplace, really around Facebook, say, in 2009. And you know, after the financial crisis, tech IPOs became pretty rare and so Facebook was one of those first big names that came to market and while they're getting big valuations in the private market, there was no easy way for their employees to sell their common shares. And again, because it was such a ubiquitous name, even early on investors generally felt pretty comfortable buying it in the secondary market. And then that led to the rise of firms like Second Market or SharesPost that allowed buyers and sellers to transact in kind of those name brand companies and just help to really pick up and create a platform for activity in the private markets. And so, you know, following that success and then eventually Facebook's IPO, we started to see more larger private names coming to market.

Jack Cassel: 4:55

You think of a Yelp, a LinkedIn, an Alibaba in those early 2010s and this created some confidence in buying in the secondary market. And then, as they got to the IPO and eventually an exit, those investors made money and so as they looked at kind of the asset classes and where they could deploy capital, we started to see that little sliver for the secondary market start to increase more and more and so by the late or mid-2010s we started to see more structured auctions for stock sales, tender offers, buybacks, and this really led to more of a marketplace for these transactions. And then to your question around the assets in particular, this is primarily equity and usually for a secondary transaction this will be common shares of the company's equity and even though you may have some sellers that will sell preferred, typically those convert to common shares at the transaction. So for the investors that are on the buy side in these transactions, I'd say 95 plus percent of them are getting now common shares in these companies.

Tanya Suba-Tang: 6:07

So what changes are you seeing in the secondary market now, and what factors do you think are influencing these shifts?

Jack Cassel: 6:14

Yeah, well, we say it used to be the wild west, but now, with just so many disparate investors and people trying to even call or hang out in parking lots saying, hey, do you want to sell your shares? I'll buy them for $12 or $15. But with that, companies do not want employees selling to unknown investors and we saw a lot of that happening in those early days. And so a lot of companies now have insider trading policies, transfer fees, prohibitions or even more aggressive rofers or rights of refusal to block those unwanted sales. And so I think that's one shift where companies have really started to take control and put in various roadblocks or milestones they feel that are appropriate in order to prevent investors from just buying or flipping their stock in the private market and then ensuring that shareholders aren't selling again to people the company doesn't know or trust or really want on their cap table, cap table. So through that again, the companies have really started to take more control around a kind of a structured process, whether that be a tender offer, a buyback process or even kind of an auction, to help find that pricing discovery. So that's where we're seeing the companies and one of the shifts we've seen. So we're seeing an increase in volume, certainly through this, as it's become more normalized and not necessarily regulated. But there's many of the companies are coming together now saying, hey, we'd like to run a secondary for our employees or our investors. You had run one six months ago or a year ago. Can you walk us through this? And as these executives move around to other private companies, they have that familiarity and experience. So you're seeing a lot more uniformity around how companies are structuring these and the amount that they're, what the price is, what the floor price is, the amount that they're allowing their employees to sell. So maybe it's only up to 20% of your vested options, but that again just gives them more control around that. And then I think the other shift we're seeing, which is always interesting in these markets these days, but just generally the broader market and the demand side. So that's maybe more of the supply side. But as we think of the demand side, the secondary market or the private markets really have a high beta to the public markets, especially during a risk-on scenario or a risk-off scenario, right. And so in 2021, we saw incredible valuations. There were 1,033 IPOs that year. Now about 600 of those were SPACs, but still we had over 400 operating companies go public and, as everybody likely remembers or saw, some of the valuations got pretty out of hand for your traditional fundamental metrics, right.

Jack Cassel: 9:03

And then in 22, we saw the market really close, starting with the public markets with, you know, we had the increase in inflation, the Fed activity, then you had the conflict in Ukraine and so we saw that other shoe really drop in early 22 as investors started to reorient themselves from growth at all costs to growth, with a blend of operational and cash efficiencies and a path to profitability.

Jack Cassel: 9:28

So then, as you think you know, from a demand side, as they reoriented to what they want to own and buy, and then specifically at what price, that slowed down the volume in activity in the private markets because these companies had raised at call it you know, 40 times forward revenue and they said well, you know, we're not buyers at 40 times based on today's fundamentals or our particular model in math, we're buyers at 10 times where your public comps are trading.

Jack Cassel: 10:01

So, as much as we saw in the public markets, a trough, with a lot of these IPO companies having to just delay because the markets weren't there, it was very similar to the private markets. Then fast forward to last year on both the IPO side and then again quickly correlated to the private side. We saw a balance in valuations again and through 24, it was actually the highest volume we had seen in years in the private secondary markets due to really that pent up demand. And so we've seen that gap and that spread really close to where the bid-ask is for private companies and therefore we're seeing a lot more investors come in. And again back to the earlier point, this has now become an asset class for a lot of investors as they think of the broader alternative space. This gives them an opportunity to have call it, some call options in the private companies that are illiquid, but they're able to get in at a reasonable price point with a foreseeable exit, and I think that's going to continue for us into the future.

Tanya Suba-Tang: 11:03

And speaking about the future, I'd love to get your thoughts and outlook, for what do you think we can expect over the next few years? I mean we've had leaps and bounds just for the past several years. What do you think we can expect looking forward?

Jack Cassel: 11:18

Yeah, well, as we're saying right now, with these markets everybody's crystal ball isn't necessarily broken, it's shattered. So take it all with a grain of salt, but I think you know high level. Look, we've seen the trend of companies staying private longer, right, and we're doing everything we can at NASDAQ to work with companies as well as regulators to make streamline that path to the public markets and make that more efficient and company friendly. But you know there's a lot of inputs and a lot of puts and takes to really get there. So we're going to continue to advocate on the behalf of our companies. That said, again, companies are going to do what's best for them and along that trend line, we're seeing companies continue to extend that runway in the private markets and they'll go public when that makes most sense for them.

Jack Cassel: 12:08

But in that time, right now, as this has picked up from an activity perspective and has really become an option and an opportunity for companies, I think we're going to continue to see the secondary market continue to increase. It'll be correlated to the public markets again, but with the familiarity with the companies being on board with this. And then I think one sub point to that is the company's need to really start to offer these liquidity programs for employees and it's really to the highest level attract and retain talent. So if you're a venture backed growth company that may stay private for a little while longer and you have this group of executives, sales leaders, engineers well they're getting likely offers from public companies that might have a shorter vesting schedule or a double trigger vesting schedule and, plus, it's liquid. So you can quickly look on your app and see that it's trading at $100 per share where for the private companies, you don't know when the company will go public.

Jack Cassel: 13:12

It's completely out of your control. And so, for those companies having this as almost an HR benefit, it's really become imperative for them to stay competitive against some of the larger incumbents or larger public companies to offer some partial liquidity to their employee base. And I think, as we look holistically, the number continues to fluctuate. But call it, you know, there's 1,400, 1,500 unicorns globally right now. There's probably over 1,000 here in the US, but if you equate that valuation, that's about $3 trillion as an asset class right for the secondary market, and so I do think that this will continue to expand globally. And so I do think that this will continue to expand globally.

Jack Cassel: 13:57

I think we'll continue to see demand from both employees and early shareholders asking this of their companies. I think, as we mentioned, given the returns for the investors, we're seeing more and more companies or firms start to create specific vehicles that will participate and even have, you know, aum or a fund attributed to just the secondary market, and we're starting to see ETFs now exchange traded products play in this private market space more through kind of their SBVs or their special purpose vehicles. So there's a lot of innovation going on here to get into this asset class and therefore I think over the next decade we're going to continue to see innovation expansion and hopefully this continues to trend well for the public markets. But I think in the interim this is here to stay and we're very bullish on it.

Tanya Suba-Tang: 14:47

Well, thank you so much, Jack, for sharing all that wealth and insight. I mean, wow, I think that's something to definitely look forward to over the next decade, and hopefully we can have you back and you can give us an update on how everything's going.

Jack Cassel: 14:59

I'd love that Absolutely.

Lindsey Helman: 15:05

Thank you to this month's guest, Jack Cassel, for sharing his insights into secondary markets. Join us next time for another Financial Perspectives episode, airing on the last Tuesday of the month. We love hearing from our listeners and want to hear what you thought of this episode and any topics you'd like for us to cover. Send us a message using the link at the top of each episode description or email us at podcast@cfa-sf. org Thank you for being a dedicated listener. This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website at cfa-sf. org or connect with us on LinkedIn.