Inside the Revival of Venture Capital Liquidity with an Industry Pioneer

Hans Swildens · Goldman Sachs

Venture liquidity is structurally constrained: distributions fell from about 20% to 5-10% yearly, and IPOs cannot return the capital.

Venture funds used to distribute about 20% of their value each year. Over the last five years that has fallen to 5-10% on average, more than halved. Hold periods are now about fourteen years, which makes the illiquidity structural. NAV is large: McKinsey put illiquid prior-fund NAV at over $1T, and others say over $3T. Even if IPOs normalize to about 50 a year, that is not enough to return the capital in the system. Marks are also getting more extreme, with some private NAVs undervalued and others overvalued. Liquidity is concentrated in the top 25 private names, while the roughly 30,000 other private companies remain illiquid. Secondaries, tenders and continuation funds are the main response.

“the amount of distributions coming out of the venture funds get over halfed. So traditionally, we have 20% or so per year of distributions, and we've gotten down to five to 10% a year on average over the last five years.”at 9:16

Hans Swildens · Goldman Sachs

Venture secondaries can grow larger than the primary market, with estimated secondary volume far below primary volume.

Industry Ventures estimates the venture secondary market at about $170B this year, while the primary market may invest about $1T this year. Historically the primary market ran about $300-500B a year over five to ten years, so the secondary market still has room to grow. In every other asset class the secondary market is already larger than the primary market. Secondary-of-secondary trades, where secondary buyers themselves get liquidity through secondaries, are a multiplier that could make the venture secondary market bigger than primary.

“And so we think that the venture growth market on the secondary side of the market can be larger than the primary side of the market.”at 19:32

Hans Swildens · Goldman Sachs

Greater volume and transparency in venture secondaries are making buyers and sellers more comfortable transacting.

Historically there were few venture secondary transactions, so it was hard for sellers and buyers to determine the right price. Employee tenders and primary rounds now give visibility into valuations. With more trades and more price transparency, both sides are more comfortable transacting, which is driving more volume in the market.

“I think today with more volume and more transparency, that's just making both buyers and sellers more comfortable to transact.”at 21:23

Hans Swildens · Goldman Sachs

AI is splitting older software firms: AI-first rebuilds accelerate while laggards decelerate and lose budgets.

Older venture-backed software companies are diverging. Some that have not adopted AI are decelerating, as customer budgets shift to AI and AI coding tools can replace what they built. Others have rebuilt their tech stacks to be AI-first, resold AI products into their existing customer base and are seeing dramatic acceleration. Vertical SaaS and vertical services-tech companies that pivot and add AI can become fast-growing, more profitable and leaner in cost structure. Several such companies were acquired last quarter at very high exit multiples after building AI automation for their sector workflows.

“There's a cohort of older companies that haven't seen acceleration. They've seen deacceleration with the AI technologies being adopted because budgets shifting away from what they were doing... And then you're seeing the exact opposite in some older companies where they've rebuilt their tech stack to be AI first.”at 4:44

Hans Swildens · Goldman Sachs

IPO bar is high: investors demand scale, growth and profitability together, pushing companies to stay private longer.

To go public today a company has to be very large and grow at a certain rate. IPO investors also want profitability and growth combined. This adds pressure for companies to stay private longer. The secondary market then enables that, because employees and shareholders can get liquidity there without going public.

“growth has to be a certain rate. A lot of the people participating in the IPO market want to see profitability and growth metrics combined.”at 5:52

Hans Swildens · Goldman Sachs

Private AI-era companies face valuation whiplash: rapid multiple expansion can reverse via competition before they list.

Investors buying private AI-era companies see fast growth and extreme valuation expansion. But while the companies are still private, growth can stall or turn negative, and valuations can contract, because competitors or new technologies disrupt them. Historically this happened episodically, not across the market. It is new now because the pace of technological change has compressed the window of success. Whether these businesses can build durable growth and moats before they go public is therefore an open question.

“You're buying private securities, they're growing, you're seeing multiple expansion, you're seeing extreme valuation expansion, but then while they're still private, you're seeing potentially contraction due to competitive threats and things.”at 11:24

Hans Swildens · Goldman Sachs

Most AI-era exits will be lower-growth, higher-profit buyouts; tech buyout funds can roll up sectors for cash flow.

A few AI-enabled application companies were acquired last quarter at very high exit multiples. But Swildens expects most venture-backed exits to be buyouts. These will show lower growth but higher profitability over time. Tech buyout funds that execute well can aggregate multiple companies in a sector and run them for cash flow rather than revenue growth.

“But I would say a majority of the businesses are going to be more buyout exits where you'll see lower growth but higher profitability over time. I think that the tech buyout funds, if they execute well, will be able to go into sectors and aggregate up multiple companies”at 13:32