A venture secondary transaction buys an existing investment from another holder. The object being sold may be company shares, an interest in a fund or an interest in a vehicle that itself holds an investment.
Those are different purchases. Before discussing the discount, establish exactly what changes hands, which rights accompany it and what the buyer may have to pay after completion.
Identify the asset and the seller's title
In a direct-share purchase, confirm the issuer, share class, number of shares and registered holder. Reconcile the seller's records with the company's records and examine any nominee or custodial arrangement.
Ask whether the shares carry the rights assumed in the valuation. A price from a recent preferred-share financing may be a poor reference for ordinary shares with different distribution and control rights.
In an LP-interest purchase, the buyer acquires an interest governed by the partnership agreement and relevant transfer documents. The economic exposure includes remaining assets, liabilities and future obligations. It is not simply a slice of today's reported NAV with no further commitments.
Obtain the required consents and waivers
Review transfer restrictions before promising a completion date. Company agreements may contain approval requirements, rights of first refusal or other provisions affecting a sale. The specific documents determine the process.
The NVCA's US model documents include a right-of-first-refusal and co-sale agreement, illustrating why the share purchase agreement alone may not resolve transfer rights. Use the documents actually governing the holding, rather than assuming the model applies. NVCA model legal documents.
For a fund interest, establish what manager consent and investor checks are required, whether side-letter rights transfer and whether the seller remains responsible for any obligations after the sale.
Define the reference date and price adjustments
Fund-interest transactions often need to reconcile activity between the valuation reference date and settlement. The contract should specify which cash flows adjust the price and how they are verified.
Consider an illustrative agreement to pay 85% of a £1m reference NAV: an initial price of £850,000. Before completion, the seller receives a £50,000 fund distribution. Assume the purchase agreement deducts that distribution pound for pound and there are no other adjustments.
| Item | Amount |
|---|---|
| Initial agreed price | £850,000 |
| Distribution adjustment | −£50,000 |
| Settlement payment to seller | £800,000 |
| Remaining unfunded commitment assumed by buyer | £100,000 |
| Settlement plus that future commitment | £900,000 |
The £100,000 is not necessarily payable on completion, but it belongs in the buyer's capital plan. The example excludes transaction costs and any liabilities beyond that commitment. Different agreements can allocate interim calls and distributions differently.
Underwrite the remaining assets afresh
A discount to NAV is a price relationship, not a return forecast. Examine the date and basis of the NAV, the concentration of remaining holdings, expected financing needs and the time required to realise them.
If a reported £1m NAV relies heavily on one stale private-company valuation, an £850,000 offer is not automatically attractive. Model the proceeds likely to reach the purchased interest after underlying expenses, preferences and fund economics.
Also check how much information the buyer will receive before and after closing. Buying an interest without a workable reporting right makes later valuation and decision-making harder.
Resolve conflicts in manager-led transactions
Where a manager arranges a transfer into a continuation vehicle it also manages, the process needs scrutiny on both sides. Existing investors may be deciding whether to sell or roll, while new investors evaluate the acquisition price and new terms.
ILPA's continuation-fund guidance recommends clear rationale, conflict handling, price validation and sufficient information for LP decisions. These are industry recommendations; the governing agreements and applicable law determine the actual requirements. ILPA continuation-fund guidance.
Make settlement a verified exchange
Confirm the conditions to completion, authorised payment instructions, documents delivered and evidence that ownership records have changed. Establish who handles any withholding, transfer taxes or later adjustment under the transaction's jurisdiction and terms.
The buyer should finish with more than a signed purchase agreement: a reconciled price, completed approvals, recognised ownership and a schedule of future obligations. Those mechanics turn an agreed secondary price into the investment the buyer intended to acquire.
FAQ
What is a VC secondary?
It is a purchase of an existing investment, which could be company shares, a fund interest or an interest in another holding vehicle. Sale proceeds ordinarily go to the selling holder. A wider transaction can combine secondary purchases with a primary financing that supplies new money to the company.
What is the difference between a direct and an LP-led secondary?
A direct secondary transfers a company security. An LP-led sale transfers a fund interest and the associated exposure to remaining assets, liabilities and commitments. The diligence scope follows what is being sold; a fund interest is not merely a basket of company shares at today's NAV.
Can an SPV buy shares in a secondary transaction?
Yes, where the structure can hold the security and the required parties accept the transfer. Confirm title, investor admission, company consent and any rights of first refusal before funding. An SPV can aggregate buyers, but it does not override the issuer's transfer restrictions.
Is the purchase price the buyer's total capital requirement?
Not necessarily. A fund-interest buyer may assume undrawn commitments, and transaction costs or adjustments can add to the requirement. Reconcile the settlement amount separately from future obligations. A discount to reference NAV does not remove the need to fund later calls.
Does buying below NAV guarantee a return?
No. NAV is an estimate at a date, and the remaining assets may realise less, take longer or require more funding. Examine the valuation basis, security rights, concentration and costs. The discount describes the purchase price relative to a reference value, not the eventual profit.
