Palico First to Win FINRA Nod for Online LP Secondaries

Palico aims to streamline and lower costs for LPs by moving secondary market transactions from an opaque, fee-heavy offline process to an accessible online platform

In July, Palico, a Paris-based company, received approval from the Financial Industry Regulatory Authority (FINRA) to become the first company to facilitate end-to-end LP secondary transactions online as an electronic trading system (ETS).

This approval can significantly impact the LP-led secondary market, as LPs require liquidity sources as, companies remain private for an extended period, and brokers neglect tiny LPs.

Palico is configured as a marketplace. LPs interested in selling either a single fund stake or a collection of stakes from various funds submit a data room containing information about the assets they are selling.

Buyers on the platform can request access to an LP’s data room and contact the LP if needed.

Palico initiated the development of its marketplace more than two years ago, according to Christopher Jeffery, the company’s general manager, in an interview with TechCrunch.

Initially, it served as a platform for vendors and buyers to connect before conducting an offline transaction. By the conclusion of the summer, Palico anticipates the introduction of the buying feature directly on the platform.

Jeffery stated that the platform provides a standard set of deal terms for each transaction, but LPs are not required to utilize them.

Jeffery stated, “Buyers can effortlessly inspect the items that are available for purchase and, in essence, bid on the stake or portfolio, thereby enabling the seller to select and finalize the transaction.”

“It is not significantly different from how eBay operates when you conduct transactions.”

This announcement occurs amid an unprecedented surge in venture secondary markets.

Jeffery stated that the LP side is also experiencing a surge in activity, even though most recent attention has been focused on direct secondaries purchasing an existing stake in a single company.

LPs also require liquidity because venture capital firms, which already maintain portfolio companies for a more extended period than any other asset class, continue to do so.

Jeffery also mentioned that many sellers regard secondaries as a portfolio management instrument. “Many institutional investors are acquiring greater sophistication regarding secondary markets.”

L and GPs’ composition in venture capital has also undergone significant changes. A few firms, once the dominant force in the cottage industry, funded by large institutional LPs, were once involved in venture capital.

That has been altered. The market has significantly transformed due to the proliferation of micro and emerging VCs over the past decade and even more so in the past five years.

Smaller funds result in more minor LP interests. Palico can collaborate with LPs of all sizes; however, it is particularly beneficial for smaller LPs that are frequently unable to cooperate with secondary brokers.

Jeffery stated, “Those brokers are heavily incentivized to focus on the large tickets, much like in real estate.” “That is where [Palico] is of significantly greater value.” We have transactions that commence at $1 million.

One of the primary factors is the availability of a venue that provides a cost-effective method for selling lesser stakes. Brokers will be required to increase their fees if they begin to engage in stakes that are less than $20 million or $10 million.

Despite being the first, Palico will probably not be the last company to receive sanction to facilitate LP-led secondary transactions online. However, it is likely to be the sole instance for some time.

Caplight, Hiive, and Notice are among the numerous secondary-focused firms established recentlyer, most concentrate on direct secondaries.

Jeffery stated that this is not unexpected, as direct secondaries are somewhat more straightforward to quantify in terms of data, as numerous company valuations on the direct secondary market are linked to primary valuations from funding rounds or mutual fund marks.

Pricing a secondary stake in an LP is slightly more intricate.

“At the fund level, several underlying companies may be shared by multiple funds; however, they are not formed in the same manner,” Jeffery stated. “You are unable to standardize each fund as easily.”

Palico is well-positioned to satisfy the increasing demand for the LP-led secondary market, as a growing number of purchasers enter the market and LP liquidity issues appear unlikely to be resolved shortly.

Jeffery stated that the broader secondary space will continue to expand; however, it is still a tiny proportion of the total AUM in private markets.

“Institutional investors have consistently allocated an increasing amount of capital to alternative investments.” You are interested in exploring the potential of these funds as they age. Additional funds will certainly be allocated to secondary markets.