Private Secondary Market Transactions: Opportunities, Challenges, Transactions & Audit Considerations

The global private secondary market has expanded significantly, currently valued at over $100 billion in annual transaction volume. Traditionally, limited and opaque, these transactions are becoming increasingly mainstream, offering new avenues for investors to access equity in high-growth private companies. This article will give an overview of the private secondary market, including participants, transaction types, opportunities, challenges, types of transactions, and how these transactions are audited.

What is a Secondary Market?

A private secondary market is a platform where investors buy and sell existing securities of private companies and private investment funds. Unlike public secondary markets such as the New York Stock Exchange (NYSE), these transactions occur off exchange, often through negotiated deals, and involve complex legal and business considerations. This market plays a crucial role in creating liquidity for illiquid holdings. For instance, early employees or seed investors in a startup can monetize their equity by selling shares to new investors—without waiting for an initial public offering (IPO) or acquisition.

Key Participants

• Sellers: Typically include individuals, venture capital firms, or institutional investors (Limited Partners or LPs) seeking liquidity for reinvestment, portfolio rebalancing, or other financial needs.
• Buyers: Often secondary funds, asset managers, or high-net-worth individuals looking to acquire stakes in promising private companies or funds.
• General Partners (GPs): Fund managers who may initiate GP-led secondary transactions, such as continuation vehicles, to offer liquidity options to existing investors.

 Common Transaction Types

• Private Equity Fund Interests: LPs sell their stakes in private equity funds to other investors.
• Direct Private Company Stock: Early stakeholders sell shares directly to new investors, often requiring company approval.
• GP-Led Continuation Vehicles: GPs form new funds to acquire assets from existing ones, giving investors the choice to cash out or roll over their interests.

Opportunities

• For Sellers:
• Liquidity: Unlock capital from long-term, illiquid investments.
• Portfolio Optimization: Rebalance holdings or exit specific positions.
• For Buyers:
• Reduced Risk: Acquire known assets, minimizing “blind pool” exposure.
• Discounted Entry: Potential to buy at below intrinsic value.

Challenges

• Limited Transparency: Valuations and deal terms are often private, complicating price discovery.
• Transfer Restrictions: Legal hurdles may delay or prevent share transfers.
• Extended Timelines: Settlements can take weeks or months.
• Administrative Complexity: High documentation and compliance burden.

Types of Secondary Transactions

Tender Offers

A tender offer allows employees and early investors to sell their shares to one or more buyers or back to the company at a predetermined price. These offers are typically company-led, giving the company control over buyers and sellers and pricing the shares. Tender offers follow a more regulated process, governed by U.S. Securities and Exchange Commission (SEC) provisions, ensuring transparency and compliance.

Direct Secondary Sales

A direct secondary sale occurs when one investor sells shares directly to another investor. These transactions are not initiated or sponsored by the company, making them more flexible but also subject to company-imposed restrictions.

Right of First Refusal (ROFR)

To maintain control over ownership, companies and existing investors often enforce a ROFR. Before a shareholder can sell shares to a third party, existing investors or the company have the option to purchase those shares first. Additionally, companies may impose transfer restrictions: requiring prior approval before any direct sale can proceed.

Such restrictions help manage the cap table and protect strategic interests.

Secondary Transaction Facilitators

Platforms like Forge Global (Forge) and Nasdaq Private Markets have emerged as key facilitators, enabling transactions between employees or early investors seeking liquidity, in addition to accredited investors and family offices looking to invest in promising private firms. Forge is a private platform restricted to selected users and currently lists investment opportunities in over 200 leading private companies, including SpaceX, OpenAI, Anthropic, Databricks, Figma, and Stripe.

Investor Requirements

With minimum investment thresholds generally starting at $5,000, private equity is becoming more accessible to a broader range of investors. However, high-net-worth individuals and family offices are the predominant participants in this growing space.

Transaction Characteristics & Risks

Transactions in this space are conducted over the counter and are typically negotiated on an individual basis. The market is characterized by limited liquidity, extended settlement cycles, and manual processes for matching buyers and sellers. Common risks include illiquidity, regulatory complexity, and prolonged holding periods.

Steps to Audit Secondary Market Transactions

Below are a handful of steps required when auditing secondary private market transactions to make the process seamless:

1. Obtain formal confirmation from the issuer as part of the year-end audit. Conduct callback procedures, including a screen-sharing session to verify portal access and view the counterparty's shares.
2. Examine the stock option agreements, sale contracts, and share certificates. Ensure the counterparty holds sufficient shares as per the terms of the purchase agreement.
3. Obtain a valuation memo from the client. Confirm that the valuation of Level 3 private equity instruments complies with ASC 820, including appropriate presentation and disclosure requirements.
4. Evaluate and consider disclosing counterparty risks, market liquidity risks, and regulatory uncertainties in the financial statement footnotes.

Conclusion

The private secondary market is rapidly transforming from a niche, opaque segment into a mainstream avenue for liquidity and investment. With transaction volumes surpassing $100 billion annually, it offers sellers the ability to unlock capital and buyers the chance to access high-growth private companies at potentially attractive valuations.

However, the market’s complexity—ranging from legal restrictions to valuation challenges—demands careful navigation. For auditors, robust procedures to verify the existence, compliance with ASC 820 fair value measurement standards, and transparent risk disclosures are essential to ensure accuracy and integrity in financial reporting. As this market continues to evolve, both investors and auditors must stay agile, informed, and proactive to capitalize on opportunities while mitigating risks.