Exploring Secondary Direct Investments with Andrea Walne of Manhattan Venture Partners

The Modern CFO

With an abundance of capital chasing a limited number of opportunities, one unique entry point for investors is in secondary direct investments. Secondary opportunities consist of buying shares in private, pre-IPO companies directly from employees and investors versus the traditional route of participating in the next round of fundraising.

Andrea Walne is at the center of this world at Manhattan Venture Partners (MVP), where 80% of their investments are in late-stage companies by buying secondary investments. Andrea and her team are focused on tapping into the value that already exists. Formerly a founder of Forge Global, Andrea has worked with over 100 late-stage private companies and has facilitated over $10 billion worth of transactions. On this episode of The Modern CFO, Andrea shares insights on this growing market segment in VC, its evolving landscape, and the opportunity for liquidity it presents.

Show Links

• Check out Manhattan Venture Partners
• Connect with Andrea Walne on LinkedIn or Twitter
• Check out Nth Round
• Connect with Andrew Seski on LinkedIn

Key Takeaways

3:20 - Build a secondary position

Instead of fighting to issue a term sheet and compete with late-stage investors, MVP uses its network of relationships to enter a business at the ground level.

“We're on our fourth fund right now. With our strategy, it allows us, strategically, to pinpoint how we want to enter a business that we're interested in. When I say enter a business, we're not fighting to issue a term sheet and compete against other late-stage investors to lead a round of funding. What we are doing is generally considered “friendly” to many of our counterparts in the late-stage venture community, because we are figuring out a price point and identifying, by way of our network, (who all knows the partners of our firm really well by way of our experience); We find our way in with a certain price point and we're able to dollar cost average and choose that building of a position by way of the secondary. So, it's pretty awesome. It allows us to choose what valuations make the most sense for us.”

6:33 - The changing environment of common stock

Common stock used to be considered a risky business. Today, it’s easier to assess if a company—and therefore its common stock—is valuable early on.

“I've never seen a world where a company can raise a round of funding and be a mid-stage or late-stage company. I do say mid-stage, because I think it's important. A company will raise a round. It's typically oversubscribed—most companies are raising oversubscribed rounds. There's a ton of capital flowing in and immediately after the round is raised, we're working with issuers and their shareholders who believe that their stock is immediately worth a premium to that round, immediately after the round is closed. Precedent will tell you that, historically, you could see that common stock, which is issued to the employees of a private company, versus the preferred stock, which is issued to the investors when they invest, the common stock is usually priced at a discount, because there's inherent risk associated with common stock. God forbid there's ever a bankruptcy in a private company, the common stock gets paid back last after all the preferred stock and any debt. So, there's inherent risk associated with common stock. If you go back three to five years, 20-25% discounts for common stock were normal relative to the latest round of preferred financing. For the environment to change so rapidly is absolutely fascinating for us.”

10:03 - The danger of taxing unrealized gains

Congress has floated different options for taxing wealthy figures, like Jeff Bezos. The problem is the potential for harmful trickle-down effects that could negatively impact budding entrepreneurs and their early employees.

“Something that seems like it comes up in Congress quite often is just taxing unrealized gains. That alone is constantly brought up and constantly talked about at both the gains-perspective and then deeper on a carried-interest perspective, which is obviously gains earned by way of the profits to venture capitalists and those that are investment managers. Overall, what I will tell you is that the resounding theme across all of these proposed changes and contemplations is that clearly Congress is looking at the folks like Jeff Bezos, Elon Musk, Mark Zuckerberg, and the upper echelon of the tech community as being the only population that really matters. The more that Congress can better target them and tax them for their wealth, which was in my mind earned wealth, quite well-earned wealth, is something that I feel is so shocking, because I don't think Congress realizes how that permeates down to those who are really the rank and file working at tech companies. Employees these days are given stock options at private companies. That doesn't mean that they own the shares outright. A stock option simply means they have the right to exercise, AKA pay a cost, to then own common stock shares in a private company. For there to be a concept of taxing unrealized gains when there hasn't been any form of a sale, where there's any gain to be had or money in the bank, it's just constantly shocking to me that that's even a consideration. It's something I worry about..”

15:44 - Successful startups are impossible to ignore

Many startups today are coming out of the gate with incredible growth and high value.

“As much as we all love working with institutional folks, school endowments, pension funds, fund of funds and the like, there's a bit more of a disconnect when you're working with an institution that has a bit more of a regimented strategy as it relates to their venture asset allocation. The passion comes from the family offices and so, when we speak to our LPs, we see that they're all seeing startups more and more and more in the news. What I think has really shifted in the last five or six years has been that you're now seeing startups with bigger market caps than any company listed on the Nasdaq or New York Stock Exchange. So, it's impossible to ignore these startups, because they're bigger by way of market cap and size and growth than most listed businesses. That shift means that startups are in the news every single day. There's a new $10 billion minted company every single day, which is shocking to hear. It used to be that seeing a billion-dollar valuation four years ago was fascinating.”

21:41 - The impact of media exposure

With large private companies doing so well, they also get a huge amount of media coverage. That means that determining facts about their financial profile is easier than ever.

“The biggest private companies these days are actually getting more exposure in the media than most public companies are, which is really fascinating. It's because they're just so big, they're so innovative, they're breaking rules, and they're making change. With all of that, they are getting more media exposure. With media exposure comes people who are covering them and digging into the company's analytics, digging into the company's financing history, revenues, and growth. There's a lot more of a spotlight on that and late-stage private companies these days than there ever was. Coupled with the concept of vast transparency, compa...