Guides • 17 June 2020
Access investment opportunities in private companies globally
Interest in the secondary private equity market has seen a marked increase, with transaction volumes reaching USD75 billion in 2018 according to Preqin. With significant growth opportunities found in private companies, investors are paying more attention to this segment of investment in search of returns. Those of us looking to diversify our portfolios want access to high-growth companies located across the globe. At Fundnel, we provide investors with the opportunity to invest in private companies globally through secondaries.
We’ve put together a quick guide to help you understand how to gain access to investments in private companies, and we’ll also share why you should always choose a licensed platform like Fundnel to navigate the secondaries purchase process.
1. Navigate the process of buying secondary shares
Unlike shares of public companies which are freely traded in an exchange, The process of buying shares in a venture-backed company typically involves many middlemen working with other intermediaries to connect you with a seller, making it fraught with complexity. Potential buyers may end up going through a long introduction process only to find that the seller is not real or has chosen to raise the price of their shares in response to interest from multiple buyers.
In bleaker scenarios, you may end up unknowingly in breach of anti-money laundering laws if proper due diligence has not been properly conducted on the seller to ascertain the ownership of the shares. Situations like these are reasons why you should always conduct secondaries transactions through an approved capital markets licensee like Fundnel.
2. Get pricing guidance based on market demand and supply
With greater information asymmetry compared to public company shares, some questions buyers may find challenging to answer are:
- What is the current market price?
- How do I decide what is a fair price to pay for the shares?
When you buy private company shares through Fundnel, we will guide you through the commonly used benchmarks and market practices of secondary share prices. Our global network enables us to carry out price discovery, and we do this by checking in with multiple sellers for the best price as well as giving you a broad overview of the pockets of sellers and buyers in the market.
3. Find someone to handle the paperwork
There are multiple stages of agreements and other paperwork to clear in order to close a secondary purchase transaction, before you can officially own shares in a private company.
Step 1: Verifying the legality of the transaction
Shares in venture-backed companies typically cannot be sold without the permission of the company and/or other investors, and some companies or investors may have specific requirements or limitations on who they allow to purchase shares of the company. Convincing them to give you the necessary permissions is not always a straightforward process.
Step 2: Due diligence
Once you have obtained the permissions needed, due diligence has to be conducted on the seller’s shares. This part of the process will require you to identify what legal entity the shares are held in, and who the ultimate beneficial owners of these shares are. Only licensed capital market entities like Fundnel are able to reliably perform this type of due diligence on sellers.
Step 3: Validating and verifying the structure of the agreement
Finally, before signing the purchase agreement, you will need to ensure that the structure of the agreement is valid. You may also want to take into consideration potential tax implications of the purchase. Fundnel works with a global network of legal and tax professionals and can help connect you to the relevant lawyers and tax advisors relevant to your personal situation.
4. Explore subsequent liquidity options
With the transaction completed, you now officially own the shares of a private company! What should you do if you want to sell these shares ahead of the company’s IPO? Simply log in to your account at Fundnel.com and click on “Monetise shares” for us to help you find a buyer for your secondary shares.
Frequently Asked Questions
What types of equity do you work with?
Our sellers come from a diverse range of backgrounds. Some are employees with common stock acquired through a stock grant, exercising their vested options; while others are institutions with preferred shares purchased in an equity financing round.
Different private companies have different requirements for transactions. We have worked with sellers to optimise their sales by creating SPVs and other structures.
How are the shares priced?
We are plugged into an international marketplace of buyers and sellers of secondaries, which will have available market prices for popular secondaries (mainly unicorns). Prices are benchmarked by the current valuation of the company as determined by their last primary fundraising round. For up-and-comers (which we like to call nexticorns), the convention is to introduce a discount to the valuation of the company. Negotiations will take place before you and the seller agree on the final price.
Is there a minimum size?
We aim to make investments accessible for all, and we have completed secondary transactions from as low as USD20,000 to upwards of USD10m.
What fees do you charge?
We typically charge a pre-agreed percentage fee upon a successful transaction. The actual fee will be discussed before the process commences.
Do I get access to information about the company?
Private companies typically do not disseminate information on their financials, operations or strategy to the public and sellers also have limited access to this information.
This is one of the challenges faced and we are actively working to change the mindsets of the companies we work with. To assist you with your investment decision, we prepare factsheets encompassing a summary of public information on the company such as the estimated valuation. Where available, we also direct investors to other sources of information such as third-party reports and press articles. We encourage investors to conduct independent research to understand the opportunities and risks of a potential investment.
What do I need to know about legal and compliance?
Fundnel is licensed by the Monetary Authority of Singapore (MAS) and all transactions are conducted to the standards upheld by the regulator. As such, all buyers and sellers are required to have their identity and holdings verified.
Template documents which cover the entire sale process, may be provided to you upon request. It is important to note that Fundnel does not provide legal counsel to shareholders or investors – all parties are responsible for ensuring they understand the benefits and risks of this asset class and these transactions.
How are my shares held after I have purchased them?
The majority of the transactions conducted on Fundnel involve shares directly on the company’s capitalisation table. Once the transaction is completed, investors will be provided proof of ownership by the company and can contact their investor relations team moving forward.
In the case of a pooled investment vehicle, investors will hold joint ownership of the vehicle with the other investors. The manager in charge of the vehicle will be responsible for liaising with investors and providing the necessary documentation for ownership.
What happens when the company goes public or gets acquired?
In the event of an IPO, the company’s investor relations team will reach out to every individual to process the transfer of shares to a custody account.
Should the company be acquired, the investor relations team will also reach out to all parties involved. Depending on the terms, either cash or shares in the acquiring company will be transferred to the investor.
Can I sell my shares?
Yes, investors can work with us or in some cases approach the company to look to sell their shares.
Have more questions about buying secondaries? Reach out to us at firstname.lastname@example.org.