December 26, 2016

Executive summary

Late stage private equity represents a fast growing, emerging investment asset class. For companies, remaining private longer in their development lifecycle is increasingly a key part of corporate strategy and large institutional investors have responded by taking stakes in late stage private companies. Yet the asset class remains relatively opaque to many investors around the world. In this note we quantify the potential size of the market for shares in late-stage private companies in the US and conclude that the marketable size is roughly $35 billion in total and has grown from roughly $11 billion over the last five years. We expect the market to continue to grow over the foreseeable future as we see the key drivers of the trend persisting.

The US private-share market: an emerging asset class

The last few years have been characterized by an increasing number of companies that are choosing to stay private for longer, delaying the process of listing publicly in an IPO. Evidence for this trend can be found in a number of places. There has been a decline in the number of IPOs, particularly during 2016. The last several years have seen an increase in the average age of firms at IPO from around 5 years in 2010 to more than 8 years today. In addition, there has been an increase in the number of private firms valued at over $1billion — the so-called “unicorns” — totaling around 170, according to CB Insights. Companies are motivated to remain private for longer for several reasons. Among them, the ability to focus on growing their products and services without the increased regulatory and operational complexities that come with a public listing, and the ready availability of private-market capital to finance their growth.

At the same time, there has been an increase in the appetite on the part of institutional investors to invest in high-growth private companies before they list shares on public exchanges. Large investors like pension funds, mutual funds, and sovereign wealth funds see the growth potential in these companies and have been investing in venture capital funds for years, but are increasingly taking direct stakes in late-stage private companies, particularly in the technology sector.

The combination of these two trends — companies remaining private for longer and large institutional investors taking direct stakes in secondary shares — has been described as the emergence of a new asset class. The asset class of secondary, late-stage private companies lies between the existing asset classes of venture capital on one end and public equity on the other. What characterizes this new asset class? How many companies are involved? How big are the potential opportunities? How has the asset class grown and how quickly is it likely to grow in the years ahead?

Quantifying the size of the asset class
Our best estimate of the magnitude of the secondary, private-share market currently in the US is in the neighborhood of $35 billion, and that it has grown at roughly 26% per year over the last 5 years.

Conceptually, the size of the market equals total shares outstanding times the marketable portion times price, summed over a representative sample universe of companies. However, putting numbers to this calculation is not a straightforward exercise and some judgement is required. The details of the cap table and the fraction that is employee-owned are private information and, because private shares are not actively traded nor is there public disclosure of transactions, their pricing is generally not known.

First off, in order to estimate the size of this asset class, one needs to decide which companies to include. While the vast majority of secondary shares are in technology companies, there are qualified companies in other sectors as well. We focus on venture-backed US-based companies that have completed at least two rounds of venture financing and are not wholly-owned by any single private equity or venture capital firm.

Second, the fraction of employee-owned stock on the cap table of each company varies depending on particulars at each company. The sellable fraction will be a complex function of the financing specifics and compensation policies at each individual company and will change over time. For example, each financing round has a specific dilutive effect depending on the amount invested and the specifics of the deal. For shares to be considered saleable in the sense that we’re interested in, the shares need to be held by potential secondary sellers, for example in the form of vested options.
Cap-table structure

While there are common schedules of share vesting, the details differ from company to company and the net effect will thus also change over time. Here, there will be a number of drivers, including the number of employees, employee growth over time, the turnover of employees, especially of senior executives.

For the broad population of late-stage companies, each member will have its own unique sellable proportion which can vary considerably from company to company, so our goal is to estimate the mean factor for late-stage companies. The proportion that is employee-owned follows a rough pattern, and generally settles to a steady-state during the later stages of company evolution.

One glimpse into this world of private information is when companies list publicly. US regulations require that companies pursuing a public listing file detailed information, including the share holdings of company directors, officers, and other shareholders who own more than 5%. We assembled a dataset of over 100 recent IPOs that came to market between 2011 & 2016. While these companies are not necessarily reflective of current private companies, they are likely representative of the broad population of privates in terms of the overall structure of share ownership. In addition, we have taken into account the fact that companies often undergo considerable changes prior to public listing.

As expected, these companies show considerable variation in terms of their specifics, but generally show that listed executives and directors, including option pools, account for between 9-23% of shares outstanding, venture and other institutional investors own between 40-60%, with other holders owning the remainder. From this we estimate that employees, including senior executives typically own around 10% of late-stage company shares. To aim on the conservative side and to account for the fact that not all of these shares are immediately sellable, we use a figure of 8% of shares outstanding as potentially sellable in secondary transactions. We believe this estimate is reasonable and is based on our experience with several companies with which Scenic has worked with.

Aggregate sellable enterprise value
Private shares do not trade regularly and information about company finances and corporate strategy is private, making valuation difficult and share pricing potentially subjective.

However, we can approximate the aggregate enterprise value in a sample of late-stage private companies by tallying up the enterprise value implied by various financing rounds. For example, if a venture capitalist invests $100 million in a company in return for a 10% stake, the implied enterprise value is $1 billion prior to the deal. So, total enterprise value post-deal is $1.1 billion. Applying some judgement as to what constitutes a late-stage company, then multiplying by our estimate of the potentially sellable proportion of shares, we can estimate the size of the market.

Figure 1 shows these estimates from 2010 to the present.  We estimate that the total value of sellable late-stage private shares in the US is around $35 billion in value, and that this total has grown from roughly $11 billion over the last five years — an approximately 26% cumulative annual growth rate. For comparison, these growth rates are faster than that of the Dow Jones US Total Market Technology Index which grew at roughly 11% between 2010 and 2014 and at about 15% since 2013.

The years before 2014 the market grew more slowly, at roughly 19% per year. So conservatively, we estimate that the market is likely to grow at roughly a 10% annualized rate over the foreseeable future. Projecting this growth rate forward, we estimate that the market could grow to $38 billion over the next year, and to over $46 billion over the next three years. This growth depends on several key factors, including the continuation of inflow of capital into private companies, and the pace of IPOs and other types of exits.



Figure 1. Estimated sellable market value since 2010 in billions of dollars. Large increases in valuation (“up-rounds”) at Spotify, GrubHub and others, as well as the Facebook IPO are indicated. Dashed line represents a projection of a 10% per year growth rate forward for 3 years.


The big jump in value from roughly $5 billion to over $9 billion in the second quarter of 2011 was due to new venture funding rounds at several companies, including Spotify, Five9, Coupa Software,, GrubHub, and; as well as some new additions to our database of late-stage companies, including Teladoc, Outbrain, 2u, and Topgolf International. The drop in value from over $10 billion to under $7 billion in the third quarter of 2012 was primarily due to the Facebook IPO in May of that year.
Our current estimate of $35 billion sellable value comes from 168 late-stage companies in our database. Figure 2 shows that the number of constituents in the market has declined from a high of 209 companies at the beginning of 2012. This decline comes from “exits”, primarily IPOs but also mergers and other corporate actions that take private companies out of the asset class.

Starting in 2014, the total marketable value grew strongly from under $10 billion to a high of just under $35 billion in the third quarter of 2016 (Figure 1). During this same period, a large number of companies IPO’d, bringing the number of late-stage private companies down — a trend that has continued until recently despite a relative paucity of IPOs during 2016 (Figure 2).


Figure 2. Number of late-stage private companies in the Scenic database and number of IPOs on NYSE and Nasdaq over the same period.


It is well-known that the sector composition of the private market is dominated in dollar terms by information-technology services and Internet companies like Uber, Palantir, Snap, WeWork, Pinterest, and Dropbox. However, our analysis shows that the relative proportions of these industries and the overall sector composition of the private market has been roughly constant since 2010.

We expect that the sellable secondary market in late-stage private companies will continue to grow in size as we see the trends driving this growth will continue: a significant number of companies will likely opt to stay private for longer, given the advantages this strategy offers disruptors, together with a continuation of a large volume of available capital that late-stage companies are able to attract from a widening pool of institutional investors. These trends are likely to create an increasingly liquid market for private-company shares, as better understanding of late-stage private company equity leads to broader market acceptance of the asset class. As the asset class becomes increasingly higher-profile and more sellable, we believe it will continue to offer long-term investment opportunities for investors beyond just the early financial adopters.



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The information contained herein is not a complete analysis of every material fact respecting any company, industry or security. Although opinions and estimates expressed herein reflect the current judgment of Scenic Advisement, the information upon which such opinions and estimates are based is not necessarily updated on a regular basis; when it is, the date of the change in estimate will be noted. In addition, opinions and estimates are subject to change without notice. Scenic Advisement from time to time may perform corporate finance or other services for some companies described herein. While the information contained in this Report and the opinions contained herein are based on sources believed to be reliable, Scenic Advisement has not independently verified the facts, and assumptions and estimates contained in this Report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this Report. Scenic Advisement, its managing directors, its affiliates and/or its employees may have an interest in the securities of the issuer(s) described and may make purchases or sales in the securities of the same issuer(s).  This material is not an offer to sell or the solicitation of an offer to purchase any security.

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Peter Christiansen
Director of Research
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