After a two-year quiet period in the Canadian secondary market, shareholders are striking more deals to sell their shares in private companies. Their growing need to generate liquidity in the sluggish exit market is colliding with pent-up buyer demand, according to investors and advisers in the space. 

The most obvious sign of a recovery came last month, when Burnaby, B.C.-based legaltech firm Clio announced that it raised a whopping US$900-million Series F, largely from selling secondary shares—that is, equity stakes in the company held by early investors and employees. 

It’s a reversal from the previous two years, when the secondary market deflated as buyers and sellers were at loggerheads over what the shares were worth. Now, as company valuations begin to stabilize, the global market for secondary shares is on pace for a record year, according to secondary-market broker Jefferies Financial Group. 

Deals reached about US$68 billion in the first half of 2024, Jefferies found in its review, up from US$43 billion for the same period last year, and a record for the period. A recent survey from Toronto-based advisory firm Setter Capital reported similar results. 

Activity began picking up globally late last year in response to pent-up demand and shareholders coming to terms with the new—often reduced—value of their equity, said Mike Evans, senior vice-president at Setter Capital. “Sellers can’t hold on forever in some cases,” said Evans. “They’re more comfortable being able to accept a discount versus trying to hold out for par.”

Some big-name investors are angling for deals in the secondary market. Last year, Toronto-based Brookfield Asset Management and Silicon Valley’s Sequoia Heritage teamed up on a US$1-billion fund (of which they each contributed US$250 million) to buy discounted shares in tech companies. The fund, Pinegrove Capital Partners, agreed to buy SVB Financial Group, Silicon Valley Bank’s venture capital business, in May for US$340 million, down from its peak valuation of US$572 million. The deal gave Pinegrove access to a US$10-billion venture capital portfolio. 

Part of what’s driving secondary deals is pressure on investors to return capital to the limited partners (LPs) who invest in their funds. In the past two years, relatively few of their portfolio companies have had exits, either by going public or through a takeover. That has curbed returns for investors. 

Selling existing shares in portfolio companies is one way to generate liquidity outside a typical exit window, said ​​Ian Carew, managing director at Toronto-based Northleaf Capital Partners, which mostly invests through secondary deals. “Every [investor] I talk to is looking for ways to create some kind of liquidity in their portfolio,” said Carew. The question, he said, is, “Are they going to get a price they can stomach?”

For companies, selling secondary shares is a way to bring in new investors without excessively diluting equity for existing shareholders, including founders and early employees. Refreshing the cap table can also help a firm reach a growth milestone that early backers may not have experience with. 

Partnering with new investors was a big motivation for Clio’s secondary-heavy deal announced last month, as the company works toward going public, CEO Jack Newton told The Logic. “We’ve got investors that, in some cases, have been on the cap table for 16 years,” he said in a July interview. “As we contemplate an eventual [initial public offering], this is a bench of investors that has a really deep set of experiences in both taking companies like Clio to the next stage of growth and scale.” 

Matthew Leibowitz, co-founder and managing general partner at Plaza Ventures, said he’s seen an uptick in Canadian companies exploring secondaries in just the last few weeks, after what he called a “very, very quiet” period in the market. Until recently, companies that raised large funding rounds during the era of record-low-interest rates were focused on “right-sizing” their business, said Leibowitz. That often means cutting costs through measures like layoffs in order to run more efficiently. Those firms now look more appealing to secondary buyers like Leibowitz, who said he’s considering a few potential deals after a prolonged dry spell. 

Overall, Canadian investors and companies are minor players in the global secondary-deal surge, said Evans, given their size relative to geographies like the U.S. and Europe. But he said the trend line in Canada is similar to the broader market. Earlier this year, he said, changes to the capital-gains tax policy prompted a bit more secondary transactions in Canada among asset owners eager to sell shares before higher inclusion rates kicked in on June 25. 

Carew said the secondary market still isn’t as busy as it was at its peak in 2021, but it’s more active than it was leading up to the pandemic. Until recently, buying and selling secondaries in Canadian venture-backed companies was uncommon, said Carew, with investors risking being deemed poor syndicate partners by their peers if they sold their equity before seeing a company through to an exit. “That stigma associated with it is certainly diminished over where it was.” 

With secondary sales increasingly viewed as a typical investment tool in Canada’s maturing market, investors are primed to strike deals while conditions are right, Carew said. Now, before other exit windows reopen and the economy fully recovers, is a good time, he said. “There’s strong opportunity for secondary transactions through the balance of this year,” said Carew. “And we’ll see what next year looks like.”