The New York VC firm has completed 300 secondary liquidity transactions in the past nine years, valued at more than $500 million in assets, says Samuel Schwerin, a Millennium managing partner.
Secondary liquidity events, or secondary sales, refer to shareholders selling their positions or investments in pre-IPO companies to other investors. Schwerin says he expects such deals to become a $10 billion business within five years. This year, secondary sales are expected to hit more than $3 billion, up from the $1 billion in 2009, he says.
Secondary liquidity events are good for both investors and the companies, says Schwerin. Millennium provides a service to investors that would otherwise be locked into “all or nothing” events, such as an IPO or sale that might not ever happen. Instead of waiting for an exit, which could take years (it typically takes about 10.4 years for a VC-backed company to go public), investors can sell part of their holdings to firms like Millennium as a way to alleviate fears.
“We allow investors to have greater patience, which is needed today particularly given the volatility of the capital markets,” he says.
In April, Millennium closed its fifth fund, which raised $280 million. The fund was oversubscribed and is the industry’s largest pool of capital dedicated to secondary direct transactions, Schwerin says. The firm also provides growth financing and venture debt but the “vast majority” of Millennium’s investing is secondary transactions, he says. Millennium tends to invest from $5 million to $20 million per deal but is flexible and has put in as much as $50 million, Schwerin says. “I once paid for someone’s honeymoon.”
So far, Millennium has racked up stakes in companies like Facebook, Zappos, ArcSight, GreenDot, NetSpend and eHarmony. The stakes are small, typically from 7% to 15% (its ownership in Facebook is less than 1%). “We allow the individuals and the management teams to take greater risk,” he says.
The stakes in Facebook, Zappos, ArcSight, eHarmony, GreenDot and NetSpend all came from Millennium’s last fund, which raised $130 million in 2006.
Small holdings can prove particularly profitable. In 2007, Millennium invested in ArcSight, a network security provider, one year before it went public at $9 a share. Millennium retained much of its stake—which Schwerin says is a “couple of percent”—through the IPO. Last month, HP agreed to buy ArcSight for $1.5 billion or $43.50 a share. Millennium cashed out of ArcSight, making more than 6x on the deal.
Similarly, Millennium currently owns 5.6% of NetSpend, which was slated to go public today but has pushed its IPO to next week. Millennium is not selling shares in the offering (the firm’s stake is expected to be diluted to 5.4% after the IPO). Assuming an $11 offer price (the mid-point of its current range), Millennium’s holding in NetSpend is valued at roughly $52.8 million. The firm is believed to have invested a little more than $11 million in NetSpend, for a 4x return if NetSpend does go public.
Some high-profile companies, like Facebook, Zynga and Twitter, are trying to discourage the sale of their shares on the secondary market and are instituting fees. Facebook is charging $2,500 per transaction, while Zynga recently raised its fee to $6,000 from $4,000, according to Bloomberg. Schwerin says such fees do slightly reduce the “user friendliness” of the process for selling shareholders, but “most of the fees we are aware of are appropriate, not excessive.” Schwerin declined to disclose if Millennium owns a stake in Twitter or has approached the company.
Millennium itself doesn’t charge fees or pass on expenses to selling shareholders, Schwerin says. Instead, the firm tries to make the transfer process, including transaction documentation and securing company approval, as easy as possible for the seller.
“In the end, we hope by reducing the distraction of secondary transactions, more will occur, but also that management will have more time to spend making the company successful,” Schwerin says. He estimates that more than 80% of shareholders return to Millennium for repeat transactions.
So how does the firm make money? Millennium makes a profit when the price of the shares it owns goes up, Schwerin says. “We all make money when the value of the company and its shares increase,” he says.
However, Millennium does charge its LPs the typical “2 and 20,” he says. “We’re structured the same as any other venture capital firm out there.”
Recently, some investors, like Chris Sacca, have been criticized for buying stakes in private companies, like Twitter, through the unregulated secondary market. In some of those cases it “seems appropriate” for angels and VCs, which are already involved in the company, to be the natural buyers of shares owned by founders and employees, Schwerin says.
But he said he is also “philosophically against” the uncontrolled, unregulated secondary markets that are developing in shares of “great companies.” Buyers and sellers, and sometimes brokers, are often working at their own discretion and are not overseen by the company or the company’s attorneys. “It’s just a shareholder selling shares to someone who is a willing buyer,” he says.
Companies should take control of the situation and institute policies and procedures over secondary liquidity deals, he says. Or they could turn to firms such as Millennium. “We work squarely within the four corners of securities regulations, and we think companies will increasingly appreciate and require that all secondary buyers also do so,” Schwerin says.