Private Market Liquidity and Secondary Transactions: Tips for Running Structured Liquidity Events

Listen in as Kevin Swan, Head of Private Market Ecosystem and Emiley Jellie, Head of Private Company Liquidity discuss a range of issues private companies may want to consider when running a liquidity event.

Tips for Running Structured Liquidity Events

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Emiley Jellie:                      Great. So thanks for taking the time. Just want to connect to hear what you're hearing from your clients. You talk with a lot of private companies, but what are the evolving needs that you're hearing that customers are trying to understand?

Kevin Swan:                        Yeah. Thanks, Emiley. We're in an interesting period of time where we've got private companies that are larger than they've ever been and a number of them that had plans to IPO last year that ultimately didn't, just given the market conditions. And that's introduced a lot of interesting challenges for these companies in terms of dealing with everything from liquidity demands and needs and the expectation that employees and shareholders had with the potential of going public, and then combine that with things like expiring options and RSUs that are also reaching expiration dates. And we're at an interesting time in the industry, especially given the broader capital markets, for a set of problems that really private companies haven't had to deal with before.


Emiley Jellie:                      And what do you think the main problem that companies are facing with right now when it comes to liquidity?

Kevin Swan:                        I think right now the biggest challenge is definitely the valuation. Private markets are very unique, very different than public markets given there isn't that daily mark to market, the stock ticker that you can just go look at and put a price on your shares. Not to mention the different liquidity stacks within a private company that's unique for every single company. I think right now the big challenge we're seeing is if a company either needs to raise capital in order to have a liquidity event, that's challenging in this market. There's capital out there, but the valuation might not be appetizing.

                                                And then secondly, even if you have cash on the balance sheet to do it, you have the challenge of pricing that. We pretty much know that most companies that raised capital in the last couple of years, just in a macro environment we're in today, they're worth less, but how much less? We've seen everything in the market from 10, 20% down rounds and different types of liquidity events to 90% in one situation. It's very difficult given the signal that's sent to the market, if a company sponsors a liquidity event at a price that is a lot below what they might have raised previously.


Emiley Jellie:                      Got it. What are the broad types of liquidity you're seeing today?


Emiley Jellie:                      You see and speak to a lot of private companies, would love to hear how liquidity's evolving and what clients are saying to you.

Kevin Swan:                        Yeah, thanks Emily. Over the past few years, there's definitely been a lot of changes in the market. There's a lot of companies that have gotten to a size in the private markets, have gotten to a scale that we've never seen before and a lot of those companies had the expectations of IPO-ing in the recent window, which very abruptly closed last year. So what we've seen is companies that have set the expectation for liquidity to their shareholders and employees who maybe were coming up against expirations of options or potentially our RSUs that lost the ability to go public, given the macro environment, and now they're having to look at alternatives to either appease that demand for liquidity or to deal with expiring different options or RSUs. And so we see companies right now trying to figure out how to handle that and how to ultimately meet the demands for liquidity.


Emiley Jellie:                      Got it. And what do you think are the biggest challenges for companies when they're exploring liquidity today?

Kevin Swan:                        Yeah, the biggest challenge we're seeing right now in the market is valuations. Unlike their public counterparts, private companies don't have a daily ticker or a stock price that you can look to know how the market's valuing you. If there's a primary investment round that'll kind of remark the company. But a lot of companies are avoiding that just given they know that they're going to have to take potentially a down round. And we've already seen some of those in the market anywhere from 10 to 20% to 70 to 90%.

                                                And so for companies that either need to raise capital to go out in order to do a liquidity event that maybe don't want to take that markdown or even if you have a company that has the capital on the balance sheet, then, it's really difficult to figure out how to price it in a liquidity event for your employees and shareholders because obviously too low of a price is not going to be appetizing to your employees. At the same time, you have to be realistic about what your equity's actually worth today. But I'd be curious to know your thoughts on that as well.

Emiley Jellie:                      Yeah, I mean I think right now a lot of companies are just struggling with how, I think we set the industry kind of standard in the past couple of years of providing liquidity for employees at private companies, and now that we are in this different macro environment, people are challenged with kind of taking the valuation hit like you just mentioned or understanding how to actually execute it. Is it a tender offer? Is it a controlled liquidity solution? Is it a one-off secondary trade? So I think that a lot of our conversations are centered around helping companies understand what fits best for them, and to be honest, every company has different needs and they've set up their plan differently. So it's working with them one-on-one just to understand what they're trying to solve for so we can best put them in a direction that makes sense.

Kevin Swan:                        You raised a really good point that there's a difference, even 10 years ago private markets and private companies equity was much simpler. There wasn't really, and maybe you're starting to see some secondary transactions happen within your cap table. The companies were still IPO-ing on a timeline that still kind of took care of all these broader issues we're talking about, but it is really interesting and if we look at our largest clients, the largest private companies we work with, I don't think I could say that any two are alike, and there's even some that are getting very innovative in how they have structured liquidity programs that regularly occur. They set that expectation and follow through. They've built up potentially an investor base in order to fund those plans, but they all have very unique flavors in terms of how they execute them, which is ultimately really tied to their culture too, in terms of how they want to speak about their equity, how equity is part of their culture and how ultimately you bring liquidity into that.

Emiley Jellie:                      Yeah, I think it's really important that while everyone can go down a different liquidity path, the end goal is to help employees and help them realize value and help them actually attain something that they've helped grow. So it makes it a really interesting dynamic too when I know we support education around these events as well, where we're kind of working hand on hand with participants, but it just goes to show how important the holistic picture is with liquidity. Should it be a tender offer? Should it be someone going out and selling their shares or finding their own investor? But it's interesting that everything kind of ties back to understanding what equity means and being able to navigate that.

Kevin Swan:                        Yeah, it's also interesting, some recent conversations I've had, is the last two or three years has been far from normal for anybody on many levels and even with the pandemic and just some other factors in the world today. And also, just honestly a lot of people kind of reevaluating their lifestyle or what they're doing. A lot of companies have dealt with employees just moving everywhere, and it's interesting because it's challenging enough when you're managing an equity plan for a company to keep track of everyone and where they're living and their tax jurisdictions and all those types of things and then you bring liquidity into it, where there's actual tangible realized events, that you have responsibility to the IRS or whatever country jurisdiction that the employee's in. It adds a lot more complexity as well in terms of how to execute these transactions and we're seeing it right now that most of these companies, if they weren't a few years ago, if they didn't have global employee bases like they do now. So that's also added another layer of complexity for these late-stage companies.

Emiley Jellie:                      I think the benefit for us, as we both know, is having the transaction readiness team, having a dedicated team of internal contacts that can help people navigate that and understand how to prepare for a liquidity event, because I think going into it it's pretty daunting, especially a structured event like a tender offer. There's a lot of questions that you don't even know if you should be asking. So I think I always like to say, let our team help you, let us help you ask the questions or at least prepare you for what you should be asking so you kind of end up with the best possible structure in the end.

Kevin Swan:                        No, I agree. One of the things I love that the team does as well and that Morgan Stanley at Work is able to provide, is every situation's unique, we've said that, we say that over and over, but there's a lot of companies that aren't necessarily creating the optionality or put it another way, some of the best companies we see are practically developing kind of multiple paths in terms of if there is potentially an IPO opportunity in a year or two, or if they start moving to regular liquidity events, or if they start wanting to support ad hoc secondary transactions to basically get themselves in a position where they can be flexible and be able to explore these different paths based on just the macro environment and what they're currently dealing with.

Emiley Jellie:                      And you touched on a couple interesting things there. I would love to hear how you're thinking about innovation in this market. I keep on referencing tender offers, but I know that there's a couple of cool things that we're working on just to help clients provide other solutions.

Kevin Swan:                        Yeah, it's interesting to see that what we talk a lot about liquidity events, that there's a lot of secondary transaction activity around these large private companies and it can be from a different number of factors. One of them is just the employees and shareholders demand to go seek out liquidity on their own terms, which isn't always in the best interest of the company, but we do see that happen and we know that there's a lot of that type of engagement just out in the market that's very unstructured. You might almost say a little chaotic and often leaves companies having to clean things up down the road to be able to figure out who actually sold what or who owns what on their cap table.

                                                What we're seeing some forward-thinking companies do though is get more intentional about proactively managing these types of transactions and whether it's someone on the executive team or founder or just a long tenured employee that might have maybe a life situation, this isn't just always about cashing out. Sometimes it's because you have kids going to college or you want to buy your first home and you're looking for that liquidity to be able to use more proactive approach that allows those unique situations to be realized.

Emiley Jellie:                      Yeah, I think the big change over the last couple of years, that what we are really noticing, is liquidity's here to stay. It's a matter of how now I think employees expect it, companies want to provide it. So there's a large dynamic around, okay, how do we make this happen every time we're talking to a customer? It is to help someone. You might have one-off people talking to someone at the company that's trying to buy a house. So it's always nice to hear from management teams who want to support liquidity for their participants because it should be a great event in a company's kind of life cycle, even pre IPO and it's nice that we finally have brought it back to private markets and are helping companies here.

Kevin Swan:                        And it's interesting when you say the expectation and how it's become almost normalized. It wasn't that long ago, maybe five, seven years ago that there was still a lot of investors in the ecosystem and companies that saw liquidity, and taking what was usually known as money off the table, was a complete taboo. You didn't do it. You waited for that ultimate liquidity event of an acquisition or an IPO and then everybody exited at the same time. That was like the ethos of the Silicon Valley and the tech ecosystem, but we've moved very quickly in the past five years to a situation where these things are become fairly normal and an expectation of employees, especially as these companies get larger and they're having to compete for talent against their public counterparts that can offer liquidity because they're publicly traded companies. So I agree with you that I don't think, sorry, I do think that it's here to stay, but it's also still very early I think.

                                                But I'd be curious, I mean because you have a capital markets background and in the past couple years there's been a lot of capital raised and moved out and so the idea of having a, bring capital to the table to run a liquidity event was it, wasn't really an issue for most of these companies, and today you have companies that are trying to extend their runway on the balance sheet, extend the balance sheet so they have a longer runway before they have to go raise and all those things but they have this demand for liquidity. Maybe talk for a minute about how you think, are companies thinking about funding these types of events?

Emiley Jellie:                      Yeah, I think when you think about the funding, you have to think about the history. So 2021, 2022 or early 2022, you saw extreme investor demand driving these liquidity events. And then as the macro changed, what we saw was companies kind of in a position of needing to deliver liquidity and not knowing how. Some companies can make the decision if they have enough capital on the balance sheet to go forward with a buyback scenario. Others will make the decision to pause. Sometimes liquidity events might not be the best possible decision for right now or boards might not be very willing to approve liquidity on a company sponsored side, which is why you're seeing the secondary market transactions. I do still think that there is investor appetite for a lot of the great companies out there and I think that we're in a very unique time in the market where investors can step in and work with companies and help them provide liquidity to companies.

                                                And a lot of the times when we're speaking to investors, they aren't as familiar with a tender offer structure, or they aren't as familiar with how to get access to these shares or working with the company. So I think that's a large discussion that we're kind of bringing to our customers and saying we might have interest, can we make an introduction or can we work with you from that capacity? I think that the bulk of it though is really up to companies’ needs and what their balance sheet looks like and their priorities. Liquidity, if you were talking to a company two years ago, it would be number one, but that's just because capital was readily available. Today it is still extremely high, and I can tell you from an employee perspective it's extremely high on the priority list. I think we both know that from working with private companies, that is how you maintain and retain talent is by offering kind of compensation plans that are holistic and explaining why they're beneficial to the end employee.

Kevin Swan:                        And we've seen that in our own business where the participation rates with employees in these liquidity events has gone up over the past couple of years, which makes a lot of sense. We were in an environment before that for a number of years where valuations kept rising and if you're an employee holding equity, all you saw was it going up every year and so why would you sell? And I think now given just the market conditions, employees are, they still believe in their equity and kind of hold it, but they also realize that maybe now is a good time to liquidate some of it, usually for life events and for other reasons or even to diversify just to have a more balanced portfolio as well.

Emiley Jellie:                      Yeah, I think the education piece around liquidity is honestly one of the most important things that you can do for your company base, but as an industry it's understanding what that equity means. And I think going through a liquidity event when you actually realize value for the first time, it's a huge life event and it helps you put in the compensation into context, which is extremely helpful for people.

Kevin Swan:                        Yeah, I remember when I was in a startup in the past and we held our first liquidity event, we did it all offline, which was a horrible idea cause we didn't have a technology platform to do it, but what I do remember about it was how it was the cultural impact and there was this, we had this fear in the company that it would potentially have a negative effect on people because they're taking money off the table, and that was seen as the reason why these companies issue equity is essentially to create that buy-in, and that sense of ownership and align everyone around the success of the company. And what we actually experienced was something very different, where when we ran the liquidity event, all of a sudden it became real to people where beforehand they kind of had this number in terms of the shares they owned, but until it was actually realized, it actually resulted in people buying into the company even more being like, wow, this is real and became something that actually really brought the culture even tighter together.

Emiley Jellie:                      I think understanding the control aspect of liquidity in private markets is really important. Understanding that you can set the parameters around 20% of vested shares you're allowed to sell, kind of empowers companies to gain that sense of ownership. And it does it in a way where you're not allowing someone to go off and sell everything, but you're allowing them to realize some value.

Kevin Swan:                        Yep. I agree, and it's nice as well when you run a broad base event that everybody gets to participate, within means.



Emiley Jellie:                      So I would love to just kind of hear what you are hearing from your customers on the private market liquidity side.

Kevin Swan:                        Sure. Today in the private markets, we're seeing companies face with a lot of unique challenges that they haven't necessarily faced before. We had incredible growth over the past 10, 12 years and some of these private companies have got to scale that we've never seen before and many of them had a path to liquidity plan for their employees and shareholders through the public markets and planning for an IPO, which many in 2020 and 2021 successfully executed on.

                                                We had some of the largest years we've ever experienced in our business, But that abruptly slowed down in 2022, almost to a complete stop, and what we've seen is companies that now are trying to manage that expectation for liquidity combined with things like expiring options, RSUs, that are also coming up to expiration dates, not to mention a lot of investors and employees still expecting that liquidity and trying to figure out how to essentially proceed. Not knowing when the IPO window's going to reopen, not knowing if they're going to pursue a private liquidity event or if they're going to support secondary transactions for one-off situations things. So we're seeing companies today faced with a number of challenges and trying to create optionality in order to deal with these liquidity issues in this current macro environment.

Kevin Swan:                        When you're talking with private companies and talking through different paths and different solutions, what is resonating and what are you finding is, what are you highlighting these days that is getting an audience?

Emiley Jellie:                      It's a great question and I think being a part of Morgan Stanley, our conversations are able to be a little bit more robust. We have so many offerings that are surrounding liquidity to help companies prepare for future events that kind of span from transaction readiness to education, to multiple other aspects of getting a company ready for an event. So I think when we're having the discussions with companies, what we're seeing is people needing to be prepared but also wanting to get a better grasp over what they should be doing to be ready in the future. Some companies are ready to pull the trigger and host a tender offer or are willing to do a different type of liquidity event at the moment. Others aren't in that position.

                                                It might not be their number one priority at the moment, but what they can do is focus on things like education. They can work with our internal team on transaction readiness and they can spend the time now, where the markets are a little bit slower to get ready for a future event and to really make sure that their employees understand what a liquidity event could potentially mean in the future and with that aspect, it's more the education. It's talking to an FA team or really understanding what the equity means.

Kevin Swan:                        And that's complimented as well by our corporate solutions as well, and especially our equity management platform where companies can have the flexibility and be able to scale a lot of these different types of programs and deal with situations where you have employees all over the world. You have different tax issues and requirements that you have to manage, especially in light of a liquidity event when there's actually realization on that liquidity. And I think equity admins in private companies today are more challenged than they've ever been. And one thing I appreciate with our clients is that they love that challenge and some of them are newer to the industry. Some have been through two or three private companies and are still running into new challenges and trying to find unique solutions to it, and the way that they push us to come along with them, it's something that I know keeps our team incredibly engaged.

Emiley Jellie:                      I think we're in a really unique position where we can help the company structure a tender offer, help the participant with education, make sure everyone's kind of aligned with some of those complex issues that you were just mentioning along taxes to ensure that you have a successful liquidity event, and not only are you ready for your private market liquidity, but you're going to be better prepared when the window does open back up. And when you can have that IPO event or when you have another large-scale event.

Kevin Swan:                        Most, as you mentioned, most of the being proactive on a number of these things and as you mentioned, being transaction ready, a lot of those things apply to all these different potential events and having your data in order, having your systems in place, having the integrations between payroll and other HR systems with your equity platform, having all those things in a state where you can move quickly, really set you up for success no matter what the market or your exec team or board throws at you.

Emiley Jellie:                      Yeah. When I joined Morgan Stanley, I was viewing liquidity very singularly and coming. You realize that you have this entire workforce behind you that can help our customers with and our clients and we want to be supportive from all angles. So I think it's really important that we are helping them with all aspects and making sure that they're ready for specific events.

Kevin Swan:                        Agree. We have a really, a real unique privilege within Morgan Stanley and Morgan Stanley at Work with our private business in that we get to be some of the first touch points these companies have with our firm, and for us it's not as, not about the specific transaction that we're running and just trying to get to the end of it and run. It's much more about that long-term relationship around, not just with the company in terms of what they're going to need with their equity needs and potentially moving into public markets in the future, potentially raising capital and all those other solutions and products that Morgan Stanley can bring, but also for employees as well, bringing the financial education, bringing the different wealth solutions or investing solutions so that they can be set up for success long-term too.

                                                I think one of the things on a daily basis that our team gets more excited about than anything else is that long-term relationship and being able to take those early steps at the earlier stages of these companies, but know that we're going to be working with these individuals for many, many years to come and that provides, I know a lot of sense of satisfaction, at least for the people that we get to work with every day.

Emiley Jellie:                      Yeah, I would say repeat customers and repeat clients are always the fun ones to work with. Whether it's a tender offer or a dividend payout or distribution or controlled liquidity. I think the people that kind of put their trust in us develop a really interesting relationship with us and everyone on the team because we all know that it takes a lot of work behind these company sponsored events to kind of put together and the coordination. So it's really important that we're kind of delivering the best possible service that we can.

Kevin Swan:                        Yep. I agree. I recently was having a conversation with one of our longest tenured clients that has been on our platform for a number of years, and they've actually been a source of some of the innovation that we've seen on our platform. They were one of the first ones that use tender offers, and actually they were a big part of developing that, the first version of that product and we're now starting to engage more around their participants and bringing in financial education, running liquidity events and it just continues to grow in that relationship given we have such a breadth of solutions in order to service.

                                                So I personally am just incredibly encouraged when you see these companies grow from very early stages and start to work with us and seeing what they develop into and some of the most exciting companies in the world, but also ones that are leaders in terms of how they think about their people, the benefits they provide them, how they leverage their equity and include the employees and the ownership of the company, and how ultimately they allow and support the liquidity so that people can go and be able to participate in.

Emiley Jellie:                      No, but I think it's really powerful when you have a tool like E-Trade behind company sponsored events too. I think that the whole Morgan Stanley offering from being able to tie in E-Trade to being able to provide participant education on the ground to being able to really just helping the company and the participant is a great well-rounded offering that we can now support our customers with.

Kevin Swan:                        One of the unique things about what we're able to provide at Morgan Stanley is to be able to meet a company and their employees exactly where they are in their journey from a startup company that's just setting up their cap table to starting to administer equity plans, whether stock options or venture RSU to running liquidity events. We have the ability to meet that company at any stage of their life cycle. And that includes as they move on to the public markets, and that's where we can bring our one firm approach of leveraging our leading investment banking group and global capital markets to meet the needs of these companies. But in the same time, we can also do the same with the employees in these companies and being able to meet them at any point in their financial journey from the very beginning of their first foray into investing through a retail brokerage account right up into a managed one-on-one relationship with a financial advisor.

Kevin Swan:                        With the flow of capital from public markets to private markets over the past 5, 10 years, we're also seeing a lot of individuals that are holding private wealth, private equity, private shares. And these individuals are both, either they obtained it through their company that they worked for, or they obtained it because they were early investors in these companies, whether through a friend or acquaintance or perhaps they’re active angel investors. And we've seen a lot of these individuals now that have built up large portfolios of private holdings that can't necessarily get liquidity on them. And so it's required us to bring solutions to the market to meet these needs and whether it's an executive in a company or a founder that has never experienced liquidity and is looking to buy their first home or just diversify given all of their wealth is tied up in their company, we've now begun building out solutions like our private market transaction desk that can help facilitate secondary transactions in order to meet the needs and the liquidity desires of these clients.

                                                And we always do that in an issuer centric manner. We really believe that any liquidity or any secondary transactions need to be done in partnership with the company itself. And we respect the company's desire to manage their cap table in control, but it brings another avenue to potentially solve some of the liquidity needs that either an individual client we have has or an individual in a company.

Kevin Swan:                        And just within the industry. So I know I'd be curious, maybe put it as a question, I'd be curious to know how, what is the sentiment you've seen out there in terms of the appetite for secondaries and how issuers kind of think about them?

Emiley Jellie:                      Yeah, I think when you're having a discussion with an issuer, you're kind of navigating multiple different things, and what they ultimately hope for a lot of times is control. So having a trusted partner that they know will put them first and that they know will kind of allow them to be a part of these conversations. I think a lot of people that allow for secondary trading on their cap table, they want to do it in a controlled manner that they can understand who's trying to liquidate their shares and have a say maybe of who's purchasing their shares. And I think the one thing that we're seeing in the industry right now that's really interesting is a lot of other providers coming up and into the market and going at it, not so much in an issuer friendly way.

                                                So I think where Morgan Stanley really differentiates ourselves is we're working with the companies, we're trying to partner with them, we're trying to partner with them for the best possible outcome. And we're doing it across a handful of tools in our toolkit, which is very fun when you're having the conversation with someone and they're trying to navigate the new world of private markets where people are going out and they are doing secondary transactions, but I think what we can bring to the table is the controlled fashion where we're working with them, we're kind of partnering on either a solution for their stock admin or we're partnering with their C-suite trying to figure out how to provide liquidity in a one-off basis.

Kevin Swan:                        And we're uniquely positioned as well having underlying cap table right on our platform.

Emiley Jellie:                      I would say that can we say we're seeing increased demand from investors now coming to us wanting to get access to some of our customers. And I think that where we're in a great position is helping make these introductions just to be a better long-term partner with our customers. Again, we're issuer centric, we want to be focused on helping them, but if there are ways to bring Morgan Stanley to help them, we're trying to make all those potential introductions and really going down that avenue.

Emiley Jellie:                      Our team are getting a lot of interest from different areas with focus on making introductions to some of our customers. And I think that given our relationship with the issuer and going through a lot of these liquidity events, we're in the position that we can help introduce them now to potentially new investors that might want access to the cap table or just to better understand the company. I think we're doing a great job of providing different liquidity needs, but in the end, it's really being able to kind of expand our role and also work with the companies in getting their message out there. A lot of the times companies will have dedicated IR teams. However, given this investor demand for private company shares, we're in a unique position where we can leverage our relationships on both sides of the house to help kind of make a connection.

Kevin Swan:                        Yeah. There's three unique aspects we have within Morgan Stanley within the private market ecosystem. The first one is we have an underlying equity management platform, the Shareworks platform, that allows companies to take care of all their cap table management equity plan needs and they can scale with some of the largest companies in the world, and also can easily transition to be able to support them, the largest public companies in the world journey. We also have a suite of liquidity solutions that allow companies and give them the infrastructure that's fully integrated into the underlying equity records in order to execute on these transactions and run liquidity events or be able to administer secondary transactions. And then the third thing, we have an investor audience that is one of the highest quality client bases in the industry that we can bring to the table. And no one else has that in the industry. So we're very uniquely positioned having those three components to our ecosystem.

Emiley Jellie:                      I think building on the trust that we have with issuers and being able to make those introductions to investors is something that we're uniquely positioned to do and we're finding that our partners are extremely open to it, so it's exciting to see.



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CRC#5774133    07/2023

This interactive discussion digs deep into some of the challenges, benefits and pitfalls private companies may face when providing liquidity to employees to meet them wherever they are in their journey. In addition to looking at the challenges associated with private company valuations, Kevin and Emiley explore the importance of employee education and why it might make sense to work with a dedicated team to prepare in advance. A trusted partner like Morgan Stanley at Work can help answer questions you may not even know to ask, introduce you to potential investors and help you assess the pros and cons of offering liquidity to your equity holders on a proactive basis. Watch the video to learn more. 

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