AT MIDNIGHT ON August 31st 1602, the public offering of shares in a new kind of enterprise closed. The charter for the venture, the Dutch East India Company, granted it a monopoly on trade with Asia until 1623, at which time, it was assumed, the firm would be liquidated. Twenty-one years is a long wait for capital to be returned. Smaller maritime ventures were generally wound up and the spoils divided after three or four years, when (and if) the ships returned. So shareholders were given an option to cash out after ten years. It hardly mattered. A faster exit route soon opened up.
The merchants who gathered daily around Amsterdam’s New Bridge to trade spices and grain proved as willing to buy and sell shares. These developments are recounted in “The World’s First Stock Exchange”, by Lodewijk Petram, a historian. One of the book’s many lessons is that wherever there is a primary market for a new kind of asset, there will soon be a secondary market.
There is a modern-day analogue in the treatment of stakes in private-equity funds. The limited partners in such ventures—the pension schemes and sovereign-wealth funds that provide capital—are in principle committed for the life of the fund, which is usually ten years or longer. The reality is different. A thriving market in “secondaries”, negotiated sales of limited-partner stakes, has emerged as private equity has matured. Today’s private-equity investors are no more locked-in to their commitments than were the Amsterdam burghers of four centuries ago.
Secondary markets are first prompted by asset-holders who really need the cash. The earliest sales in Amsterdam’s stockmarket were usually by merchants who could not pay the promised subscription. In private equity the early secondary transactions were typically distressed sales. They were often struck at biggish discounts—25% or more—to the appraised value of the assets in the fund.
Over time the stigma to selling out has disappeared: in 2019 around $85bn worth of stakes changed hands. These days the reason for the sale of a stake is often strategic. It might be to rebalance portfolios by geography, industry or vintage for reasons of risk management, say, or to reduce the number of relationships with the general partners of private-equity firms. A lot of limited partners simply wish to manage their private assets as actively as their listed ones. Often funds will sell for more than the appraised value of the companies in the portfolio.
Over the past decade there has been a trend towards secondary transactions led by general partners, says Andrew Sealey of Campbell Lutyens, an advisory firm. It might be that a ten-year fund is about to expire whose general partners do not want to sell the portfolio of…
Read More: Why the market for secondhand private-equity stakes is thriving