UK: Finding Liquidity In Late Stage Private Markets

Last Updated: 7 September 2016
Article by Simon Toms and Michael Bloch

The environment for growth companies is changing. For a start, 2016 has seen a marked slowdown in the number of IPOs that have come to the market globally.

Conditions including the European referendum, U.S. presidential elections and uncertainty over interest rate rises have all played their part, but founder/management team sentiment towards public listings has also shifted.

While IPOs provide a "badge" of maturity and market recognition (alongside the obvious injection of capital), the preparation for them is also an enormous distraction for management teams of growing companies. Furthermore, public companies have to adjust to the punishing half-yearly or even quarterly schedule of hitting targets and reporting which can encourage strategic short-termism rather than a focus on "good growth". For companies with a good business model, happy customers and economic sustainability, pushing out the IPO window may be a viable option.

The issue of economic sustainability brings us to the question of funding. A rising number of private companies (and particularly "unicorns" – those with valuations of over USD 1 billion) have successfully completed either more private funding rounds or larger private funding rounds (or both). This enables them to fund direct growth rather than capital investment from injections of cash from private investors. (Platform-based, capital-light companies in industries such as Fintech have a clear advantage here in terms of capital requirements).

The group of investors participating in these rounds has also expanded, opening up a wider pool of funds to successful private companies. This area is no longer solely the preserve of traditional venture capitalists; we are seeing sovereign wealth funds, asset managers and hedge funds, as well as corporate venturing, participating in this section of the market. These investors are joining the market for reasons that range from straightforward portfolio diversification through to opportunities to spot and nurture emerging talent and innovation to build research pipelines (often a driver when corporates set up investment vehicles).

Not all these investors have the same timeline in mind for realising their investments and, without the aligned expectation of the traditional VC five-to-seven year window until a trade sale or IPO, a number of pressures build in the market.

One is the liquidity expectation of earlier stage investors, and this has implications for the broader start-up ecosystem not just in terms of liquidity. Early stage investors are the life blood of the start-up community. They are frequently successful entrepreneurs themselves who are committed to investing in and, equally importantly, mentoring the new kids on the block. Without the release (and hopefully increase) of their investment capital, they are not able to reinvest either funds or expertise into emerging companies – and this is potentially a problem in terms of supporting the pipeline of new talent.

Another pressure comes from employees. Frequently incentivised by their start-up employers through options and share schemes, employees need a liquidity event to realise these benefits, and they need to be managed in terms of how they capitalise often large shareholdings without the company losing talent or investor confidence.

So how can we bring liquidity into the late stage growth company market?

One option is to explore the opportunity for private secondary share sales – a device frequently used in U.S. markets but much less common in Europe. In this scenario, investors wanting to realise their investments or employees wanting to sell their shares would be able to do so.

The problem is that secondary sales don't always get good press. Pre-IPO, Facebook was a notable example of the poor investor sentiment that can be generated by staff selling off shares privately.

But it would be possible to build a healthy infrastructure around secondary sales in Europe. Companies could use the mechanism as part of their structures to invest in and retain talent, and investors could exit their transactions in a timely way without the market automatically reading this to be an expression of negative investor sentiment. Various models could deliver these goals. For example, in the U.S., certain advisory firms specialise in block sales of private companies' shares in the secondary market, either on an ad hoc basis or within pre-defined windows. Key to the success of these transactions is the release of appropriate financial and operating data about the performance of the company. The success of crowdfunding in recent years points the way to another possibility for secondary sales, with platform-based services connecting buyers with sellers and controlling the release of financial information on behalf of sellers. A platform-type solution would likely bring broader access to the market; a broker approach could be more associated with a smaller qualified group of market participants and the support available on issues like due diligence and pricing.

There are, none the less, a number of questions to be answered about the design of such a market, and indeed regulatory and other barriers to be overcome, before we can expect to see secondary share trading becoming more common on this side of the pond. These include:

  • Cultural and reputational issues. There may be an unwarranted perception that secondary trading of shares by early investors and employees suggests that the company is performing badly and that investors or staff "want out". Equally in an environment where there are no barriers to "cashing out" large incentive holdings, high-talent individuals would potentially be free to leave and set up competing businesses or invest in other opportunities. While clearly this benefits the ecosystem as a whole, it potentially removes some of the levers available to encourage valued members of staff to stay with the organisations and keep working to scale it.
  • Complexity of shareholding structures. Even smaller private companies may have several different classes of share with different rights attached, and a company's articles of association may impose specific restrictions on the sale or even gifting of shares (particularly if such a transfer means the shares will go outside the company).
  • Challenges concerning pricing and information. There is a huge question around how to price equities and, related to this, how to ensure accurate and appropriate information flow to possible investors. Information for prospective buyers needs to be provided within the confines of existing regulation and in a way that ensures that pricing bubbles are not created through opportunities to acquire shares in secondary sales being infrequent or supply being artificially restricted. Furthermore the process of providing information to potential investors needs to be manageable and realistic for the company.
  • Tax. The UK Enterprise Investment Scheme (EIS) is an important incentive for investors in early stage companies, providing tax breaks on qualifying investments. However, as currently structured, this relief is not available on secondary sales and it is only available to investors who hold their shares for three years or more.

This leaves us in something of a "chicken and egg" situation. With sufficient demand in the secondary market, precedents could likely be established to deal with all of the above issues, but without solutions to these issues, demand is unlikely to build. The tipping point in demand might just come from other pressures in the market to stay private longer, which in turn will force us to think harder about how we create liquidity both for existing and new investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions