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Industry Ventures’ Hans Swildens on the State of the Secondary Market

As more traditional exit avenues have dried up, shareholders of venture-backed startups, limited partners, and fund managers are increasingly turning to the secondary market as a tool for interim liquidity. That’s meant a perfect setup for venture secondaries funds, which have been enjoying a golden age of their own (to borrow a phrase from private credit’s ascendancy).

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Hans Swildens, the founder and CEO of Industry Ventures, predicts this year’s secondaries transaction volume will surpass even 2023, which was itself a record year.

Swildens expects the growth trajectory to continue, and he’s well-positioned after raising a new $1.45 billion fund last September, the largest ever at the time (StepStone Group took top spot after raising its own $3.3 billion fund last month).

“I think the next three years are going to keep compounding on each other because the secondary market is a derivative of the primary market, and the primary market expanded so dramatically in the last ten years that now you’re seeing less liquidity,” he said. “I think this year will end up bigger than last year, and next year will be bigger than this year."

Swildens thinks secondaries have now jumped from a niche asset class to something that most investors fully understand.

“The secondary market has been growing for 20 years. There are more transaction structures, the market is getting more mature, people are getting more sophisticated. It was a market where people were explaining what they were doing, and other people didn’t understand what that was, so there was an educational component to this, and there still is on the venture capital and growth side of the market, but on the buyout side of the market, nobody needs to explain anymore.”

Swildens thinks it won’t be long before venture catches up.

“The venture market over the next few years will become that way where people won’t have us explain what a continuation fund is, what a strip sale is, how to do a tender offer, how to do fund-level restructuring. Right now, there’s a lot of education about that because VC funds typically didn’t do that, and now they’re all trying to do it,” Swildens adds.

“I think we’re in inning five, about halfway through. In the next 3-4 years, we’ll probably be in inning six or seven, and you’re going to see more innovation happening. Ten years ago, there wasn’t a continuation fund. When we started doing this, the direct secondary market wasn’t viewed as a market,” Swildens said.

The rush to meet market demand has led to a surge in both new launches and fundraising. But, Swildens says, new entrants have a tendency to quickly head for the exits when conditions change—something he’s seen each cycle over his twenty years in the market, and a pattern he expects will continue.

Reflecting on his own firm’s longevity and the surge in investor interest in the space, Swildens delivers a message of caution.

“We’ve had new players enter the game every year for the last 20 years, so that’s not new. There are a lot of ways to get this type of investing wrong. It’s not one thing. You can get this wrong 50 different ways, it’s very tricky,” Swildens said.

"You can come in and get lucky, but I think to be a systematic, repeatable, sustainable investment firm, you need to operate your portfolios at lower loss rates and higher returning asset rates. To build that portfolio is tricky.”

Swildens believes portfolio construction is the top priority and has been key to his firm’s sustained performance over the years.

“I’d say that we have a very consistent track record. We’ve built our portfolios in a certain way so that when the market cycles, we can withstand the downturn and still make money. Most of the other folks that have come into this investment strategy have failed or left because they invested capital at the wrong time and bought the wrong things. They didn’t think about portfolio construction or timed diversification, or risk or loss rates. I think people come in and just start buying stuff and don’t think about what happens if the market resets, so when it does reset, a lot of them go out of business.”

But, even for Industry Ventures, it’s been a story of trial and error through the years.

“I think new buyers don’t understand portfolio construction or risk analysis. These are things that they’re not focused on — honestly, though, these are things that we got wrong, too, for the first 5-10 years of doing this. We had to learn all these awful lessons.”

“Any time there’s attention on any asset class, a lot of capital flows into it. Some people get it to work, and some don’t. There was a similar thing in 2009 when Lehman went under, and Bear Stearns went under. It’s different now because the driver is liquidity rather than bankruptcies and financial crisis.”

Looking forward, Swildens offers a handful of predictions on the market’s evolution.

“There’s a lot of innovation that is going to happen. We’re only halfway through the innovation cycle in terms of secondaries.”

“In the venture space, one of the things that might happen is that a lot of the corporate VCs are going to start doing joint ventures and hybrid fund structures. Right now, they are in inning one or two, where 90 percent of the corporate venture capital programs are funded with balance sheet capital. So, the sophistication of the structuring of that unit is very basic, but I think in the next 5 years, you’re going to see all those units as hybrid structures with financial backers in them: outside capital plus corporate capital.”

Bob Clair

Bob Clair is a reporter at Transacted covering private equity and investment banking. He has covered breaking M&A news for several years and is a general assignment freelance reporter for The New York Times, where he shared in a 2021 Pulitzer Prize win.