Investing in the secondary market: access & opportunity

Broadly speaking, the secondary market is where most of the investment fun happens. It's how investors can buy or sell assets and securities after they've been issued. 

One of the best-known examples of a public secondary market is the New York Stock Exchange, which averages nearly $19 billion in trades daily at the NYSE closing auction alone. 

In a similar vein, investors can buy or sell privately held companies on the private secondary market.

Primary vs. secondary: A quick refresher

Before we talk too much more about investing in secondary markets, let's dive a little deeper into the difference between primary and secondary markets. 

Primary markets are where securities are created. Primary market assets are issued by the company, which receives the money from the sale. A common example would be when a company goes public via an IPO. It sells shares on the primary market to raise money. 

But when those shares get traded out in the wild, they become part of the secondary market. The original company is not involved in future trades and does not get any money from them. Instead, an existing shareholder sells their stake to another investor and pockets the cash. 

To put it in non-security terms, let's say you are the 21st-century Van Gogh. (It's okay. You can keep both ears.)

You paint Starry Night Redux. It goes viral on Instagram. You sell it to a billionaire art collector. He reaches out anonymously through a mysterious middleman, but you’re pretty sure it’s Jay-Z. That's a primary market transaction. 

But Jay-Z being Jay-Z, he’s bound to flip it for a profit. (After all, he is a business, man.) So he auctions it off for ten times what he paid. That’s a secondary market transaction. So are all the trades that take place after that. 

The creator doesn't have anything to do with secondary market sales. The seller receives the proceeds from the transaction — and perhaps eventually writes some fire bars about them. 

Why secondary markets matter to retail and institutional investors alike

Secondary markets are crucial to investors of all stripes because they provide liquidity. This makes it easy for both retail and institutional investors to buy and sell assets.

For retail investors, investing in secondary markets gives access to opportunities that might otherwise be restricted. This is particularly true as investing in private equity and pre-IPO shares becomes increasingly accessible.

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The stock market is one of the most visible examples of investing in secondary markets. But it's far from the only one. 

You can trade almost anything on a secondary market. That includes bonds, derivatives, alternative investments, commodities, and more. For some time, however, you would have had a lot of trouble finding secondary markets for one asset: private equity. Investing in startups was essentially exclusive to venture capitalists, PE firms, and the companies’ employees. 

This has since changed dramatically, with the rise of private market secondary platforms like Augment*, which enable everyday investors to buy and sell shares of pre-IPO companies. 

According to Jefferies’ latest Global Secondary Market Review, private secondary transactions hit a record high of $162 billion in 2024. That's about 110% higher than it was in 2018. The firm predicts the market will reach over $185 billion in 2025. 

The growth of private secondary markets

One of the main reasons that private secondary markets have grown so much in recent years is that they make a typically illiquid investment a bit more liquid. Fund managers need that liquidity right now, which is making them more creative about their approach to secondary markets.

Private equity fund managers are under pressure from investors who want distributions from their funds. According to CF Private Equity, distributions in 2023 were the lowest they've been in a decade, and with IPO and M&A activity still dampened, that might not change anytime soon. 

Now, these institutional investors are turning to secondary markets for liquidity and portfolio rebalancing. And there may be room for even more growth. BlackRock found that secondary volume accounts for only about 1% of total unrealized value in the private capital markets. The firm sees "significant" potential for continued growth. 

The rise of private market secondary platforms

It’s not just institutional investors piling into the space. As the private secondary market has grown, technology has risen to the challenge, offering investors new ways to connect. Augment, for example, offers a pre-IPO investment platform empowering accredited investors to explore private market opportunities. The platform makes it easy to track price history and other data, which can help users make informed investment decisions.

On the seller side, workers or investors who hold stock in private companies have a new way to liquidate their holdings. For example, an early employee in a promising startup might want to buy a house or plan a vacation. Rather than waiting for the company to go public or another liquidity event, they could use Augment’s private stock marketplace to potentially find a buyer, sell some of their shares, and realize their net worth.

That's important because private companies are staying private for longer. Morningstar data shows private companies today wait an average of 10.7 years to go public, which is nearly 4 years longer than a decade ago. Stakeholders may not want to wait so long.

Participation in pre-IPO equity secondary markets is commonly limited to certain classes of investors because of the high risks and limited liquidity involved. Platforms and sellers typically require investors to meet accreditation or qualification thresholds to ensure they have the financial capacity and sophistication to bear potential losses.

Common accreditation standards

• Accredited investor (U.S.): Individuals who meet the Securities and Exchange Commission (SEC) definition —generally a net worth over $1 million excluding primary residence, an annual income exceeding $200,000 (or $300,000 jointly) for the last two years with expectation of continued income, or an investment professional in good standing holding certain licenses. Entities can qualify based on assets, total equity, or being a registered investment adviser or certain types of institutions.
• Qualified purchaser: A higher threshold under the Investment Company Act often used for more exclusive offerings, typically requiring $5 million or more in investments for individuals or entities.
• Sophisticated investor: Some offerings accept investors who demonstrate sufficient investment knowledge and experience even if they do not meet strict wealth thresholds. Proof of relevant experience, a professional finance designation, or a documented track record may be required.

Institutional and professional investors

Many secondary market transactions are executed with or through institutional investors—venture funds, family offices, registered investment advisers, pension funds, and other entities that routinely evaluate private company risk. These investors often face fewer procedural limits but must still satisfy platform or transfer-agent requirements.

Platform, issuer, and transfer restrictions

• Secondary trading platforms frequently require investor accreditation verification (income, net worth statements, tax returns, third-party verification letters) and identity checks (KYC/AML).
• Issuers and transfer agents may impose further restrictions—shareholder agreements, right-of-first-refusal, lockups, or transfer approvals—that effectively limit which investors can buy shares.
• Some secondary trades are only offered to a pre-defined investor pool (e.g., existing investors, employees, or approved strategic buyers).

Suitability and risk acknowledgment

Investors are often required to sign suitability statements and risk acknowledgment forms confirming they understand: limited liquidity, potential for total loss, valuation uncertainty, restrictive transfer rights, tax complexity, and the company’s private governance. Platforms may also require investors to certify their investment horizon and tolerance for illiquidity.

Documentation typically requested

• Proof of accreditation (financial statements, tax returns, bank or brokerage statements, third-party letters)
• Government-issued ID and proof of address for KYC
• Investment policy statements for institutions or letters of authorization
• Signed investor questionnaires, subscription agreements, and risk disclosures

Why accreditation and qualifications matter

These requirements reduce regulatory risk for sellers and platforms and help ensure buyers can withstand the high volatility and long holding periods common in pre-IPO equity. However, accreditation does not eliminate investment risk—it only confirms capacity and, in some cases, sophistication. For certain investments, being an accredited investor is required to participate.

Next steps for prospective investors

Before seeking access to pre-IPO secondary markets, prospective investors should confirm their accreditation status, prepare required documentation, review shareholder agreements and transfer restrictions, and consult legal and tax advisers.

Private equity investments are undergoing a transformation. Qualified investors can now access private investments more easily through platforms like Augment. This opens the door to pre-IPO opportunities that would otherwise be off the table. And, with the potential to increase liquidity and lead to better-balanced portfolios in these uncertain economic times, private secondaries may only become more robust in the years to come. Before diving in, it’s crucial to understand potential risks— learn about mitigating risks in secondary market investments to protect your capital.

Investing in pre-IPO equity on secondary markets combines the potential for high returns with substantial and specific risks. A thorough risk/reward analysis helps investors weigh upside scenarios against downsides and decide whether allocations fit their portfolio, time horizon, and risk tolerance.

Primary rewards

• Potential for high returns: Access to equity at private-company valuations can result in large gains if the company successfully IPOs or is acquired at a higher valuation.
• Diversification and access: Secondary markets provide exposure to growth-stage companies and sectors not available on public exchanges.
• Early liquidity relative to primary private placements: While still limited, secondaries can offer opportunities to buy or sell stakes before a public listing, enabling active position management.
• Information advantage for informed investors: Sophisticated buyers who can perform due diligence, network with insiders, and interpret private metrics may identify mispriced opportunities.

Primary risks

• Liquidity risk: Secondary shares are often thinly traded, with no guaranteed market and potentially long holding periods until an exit event.
• Valuation uncertainty: Lack of transparent, frequent pricing means valuations can be subjective and inconsistent; comparable metrics may be scarce or obsolete.
• Regulatory and transfer restrictions: Shares often carry transfer restrictions, right-of-first-refusal clauses, or require company approval, limiting the ability to transact freely.
• Information asymmetry: Private companies disclose far less than public firms, creating material gaps that advantage insiders and professional investors.
• Concentration and idiosyncratic risk: Individual private-company outcomes are binary—failure or a skewed large payoff—so positions can be highly volatile and correlated with company-specific factors.
• Down round and dilution risk: Subsequent financing rounds at lower valuations or significant option pools can materially dilute existing holders and reduce implied value.
• Exit risk and timeline variability: IPOs, M&A, or buybacks are uncertain in timing and occurrence; macro conditions can postpone exits indefinitely.

Factors to evaluate when balancing risk and reward

• Company fundamentals: Revenue growth, unit economics, cash runway, customer retention, margin trends, and competitive moat.
• Cap table and governance: Founder and investor composition, option pools, liquidation preferences, anti-dilution provisions, and board dynamics.
• Deal terms and share class: Ordinary vs. preferred shares, voting rights, liquidation seniority, and conversion features materially affect downside protection and payout.
• Secondary market mechanics: Transfer restrictions, required approvals, seller motivations, escrow or lock-up provisions, and brokerage/platform credibility.
• Macroeconomic and exit market conditions: IPO windows, M&A appetite in the sector, interest rates, and public market sentiment influence exit possibilities and pricing.
• Due diligence quality: Availability of financials, access to management, customer references, and the investor’s capacity to validate claims.

Common Mitigation strategies

• Diversification: Investors can limit single-position exposure and build a basket of companies across sectors and stages to reduce idiosyncratic risk.
• Focus on deal terms: Investors may prioritize structures with favorable liquidation preferences or convertible features that improve downside outcomes.
• Liquidity planning: Investors can treat pre-IPO secondary allocations as illiquid and size positions according to an investor’s ability to lock up capital for extended periods.
• Use staged investments and re-checkpoints: If possible, investors can split capital into tranches triggered by milestone verification or subsequent financing events.
• Partner with reputable platforms and advisors: Investors may work with experienced secondary brokers, legal counsel, and due-diligence providers to uncover hidden risks and confirm transferability.
• Stress testing and scenario analysis: Investors can model downside cases (no exit, down round, long delay) and upside cases (IPO at multiple higher valuations) to estimate range of returns and capital at risk.

Example of Outcomes

• Upside outcome: Company IPOs at a significantly higher valuation within a few years—investor realizes multiple-times returns after accounting for dilution and conversion mechanics.
• Moderate outcome: Acquisition at a modest premium or IPO in a weak market—returns are positive but lower than initial projections and may be realized after extended holding.
• Downside outcome: Company fails, is acquired at a lower valuation, or is severely diluted—investor suffers partial to total loss of invested capital.

Conclusion: The pre-IPO secondary market can offer attractive returns but brings concentrated, illiquid, and complex risks. There is also no guarantee of a return. Investors should consider rigorous due diligence, careful attention to deal terms, and planning for illiquidity.