to making educated bids. Secondary specialists like Lexington and Landmark maintain detailed databases of thousands of deals to simplify the process.
Moreover, sellers in this market also need the consent of the general partners of each individual fund involved. Although it happens only rarely, the general partners of many funds retain the right to veto the transfer of a limited partnership interest in the fund.
Despite the complications, the appeal is clear: a chance to invest on the cheap in a venture fund where the portfolio is already defined. "A primary venture fund investment is blind pool investment, on faith," says PrivateTrade's Wisdom. "Secondary trades allow investment later on in the life of a fund, when you have a window into the strategy. Lots of sophisticated portfolio managers are going to opportunistically buy in."
Even with the expansion of the secondary market, there is no guarantee that there will be buyers for investments in the most troubled funds. David H. De Weese, partner with Paul Capital Partners, notes that the funds created at the height of the Internet bubble will not be very appetizing to many buyers. "We’re loath to bid on 1999 and 2000 vintage portfolios," says DeWeese. "There still might be a lot of pain in them."
At the same time, De Weese contends the pressure on some investors to rejigger their portfolios will create highly motivated sellers – and some potential bargains for firms interested in investing in well-established venture funds. "Opportunities in the secondary markets for people in funds like ours are as good as they've been at any time in the last decade," he says.
