5 Common Mistakes When Investing in Secondaries - and Ways to Avoid Them

Secondary venture investing is harder than it looks. The asset class concentrates liquidity around a handful of genuinely great companies, which creates the illusion that picking winning secondaries is mostly about picking winning companies. It isn't. In practice, there are five distinct ways a secondary investment can go wrong. Each hurdle requires its own discipline to prevent. At PrePublic Equity Partners today, our investment process is built around avoiding all five.

Mistake #1: Investing in a Bad Company

The most fundamental error in secondary investing is starting with a bad underlying business. This might seem obvious, but secondary markets can make it surprisingly easy to overlook. By the time a secondary transaction surfaces, the company has already attracted brand-name investors and cleared multiple primary funding rounds. The track record creates a kind of institutional credibility that people can substitute for genuine analysis.

The problem is that secondary markets operate on asymmetric information. Sellers often know more than buyers. A secondary offered at a discount to the last primary round doesn't necessarily represent value. It may instead reflect deterioration in fundamentals that hasn't yet been publicly disclosed. Growth can slow, competitive dynamics can shift, and key customers can churn, all before the information reaches the secondary market in any systematic way. Or, there can still be early stage venture risk in the technology, the market or the team that make it more of a ‘venture bet’ than ‘pre-public investment.’ 

For a well-documented example of what happens when narrative substitutes for business fundamentals, the story of WeWork's $47 billion valuation and subsequent bankruptcy is a useful reference — and a reminder that brand-name backers and a compelling story are not a substitute for underwriting the fundamentals and risks of a business.

How we work to avoid it: Every potential investment begins with a deep company memo, providing a structured assessment of the underlying business that goes beyond a summary of publicly available information. We build a formal scorecard across multiple dimensions: market leadership, competitive durability, organizational stability, capital structure and investor syndicate quality, and exit path visibility. We're assessing not just where the company is today, but whether it's positioned to keep winning over the duration of a realistic hold period.

This memo is a genuine gate. If we can't build and document conviction at the company level, we don't advance to any of the other stages in our process.

Mistake #2: Investing at a Bad Price

A great company and a good investment are not the same thing. This is perhaps the most important distinction in secondary venture investing, and it's where a surprising number of deals can come undone.

Secondary prices are set differently than primary prices. Primary rounds are negotiated between a company and a lead investor, with a clear relationship between the investment and the company's capital needs. Secondary prices are set by supply and demand in a market where information can be thin, urgency is variable (on both sides of the transaction), and the range of potential outcomes is wide. A price that looks reasonable relative to the last primary round can still be a price that doesn't work. That can result because secondary investors have their own return requirements, their own hold period assumptions, and their own cost structures that have to be embedded in the math.

The market has plenty of situations where genuinely excellent companies are available at prices that don't meet a return target. And in a market where deal flow is competitive and access is scarce, there can be significant pressure to rationalize a price that the numbers don't actually support. The FOMO can be real, which is why a formal price underwriting is so important. 

Industry Ventures' analysis of unicorn valuations post-2021 found that by mid-2024, over 80% of unicorns were sitting at lower valuations than their 2021 peaks — a concrete illustration of what can happen when secondary investors fail to account for shifts in market cycles.

How we work to avoid it: We write a dedicated pricing memo for every transaction we evaluate seriously. This memo models the full return profile across a range of exit scenarios — varying the exit timing, the exit valuation multiple, and the revenue trajectory — and stress-tests whether the investment can meet our return targets under realistic assumptions. We look carefully at the fee and carry structure, because carry and fees can represent a meaningful drag on net returns that isn't visible in the headline price (especially if the access is only available via a multi-layer SPV).

We also compare available channels. For any given company, there are almost always multiple ways to access the same exposure at different prices, structures, and minimums. The pricing memo documents what the market looks like and whether the deal in front of us is actually the best available version of the trade.

We pass on transactions that don't meet our return criteria, even when the underlying company is genuinely compelling. There are bad deals in good companies, and the pricing memo is how we work to catch them.

Mistake #3: Dealing with a Bad Counterparty

Secondary transactions involve more than just a buyer and a seller. Even in relatively straightforward transactions, there are likely to be multiple parties with different roles: the seller (which themselves come in many types), the general partner of any fund or SPV involved, the fund administrator responsible for record-keeping and NAV reporting, and potentially brokers, platforms, or escrow agents. Each introduces a dimension of risk that deserves scrutiny.

The mistakes in this area fall into several categories. Sellers sometimes have relationships or obligations — side letters, tag-along rights, or GP consent requirements — that complicate or block a transfer. Administrators sometimes lack the internal controls necessary to maintain accurate records or execute distributions cleanly. GPs of upstream funds sometimes have incentives that aren't aligned with the interests of incoming investors. And in a market where transactions move quickly and documentation can be less than desired, counterparty issues that could have been discovered in diligence often surface only after a problem has arisen. Trust and reputation are critical to resolving issues at every point in a deal lifecycle. 

The DOJ and SEC have both brought cases involving bad actors committing fraud in pre-IPO secondary transactions — a reminder that in a market where deals move quickly and documentation is thin, counterparty credibility can't be assumed.

How we work to avoid it: We write a counterparty risk memo that assesses reputation of the people and organizations we believe are material parties to a transaction. This covers issue areas like track record and operating history, regulatory standing, internal governance and controls, prior relationship history where applicable, and incentive alignment. We want to understand whether the counterparty benefits from the transaction closing cleanly, or whether their incentives are neutral or potentially adverse to our interests post-close.

It is also important to map the governance structure. Who controls transfer approval? Who controls NAV reporting? Who administers distributions at exit? In some structures, the seller is also the GP, which can represent a meaningful alignment of control and incentive. In others, there are multiple parties with different and potentially competing interests. We consider counterparty risk across several dimensions and set explicit walk-away triggers and plans to mitigate the risks we find.

Mistake #4: Investing in a Bad Asset

This is the provenance problem, and it is where secondaries transactions in the late-stage venture market are uniquely susceptible to error.

When you buy a secondary interest in a company, you're often not buying shares that sit directly on the Cap Table. More often, you're buying an interest in a fund or SPV that holds a position on the Cap Table (a single layer SPV). And sometimes, in the case of the largest companies, you are two layers away from the underlying stock and purchasing an interest in a SPV that holds interest in another SPV that owns the underlying asset. In a single-layer structure, the chain is relatively simple. In a dual-layer or a triple-layer structure — which has become increasingly common in late-stage secondaries as companies restrict cap table access and intermediaries build products around that constraint — the chain can become complex enough to give rise to material concerns (even if all the parties are executing with the best of intentions). The risk is concrete and these issues don't always emerge until the moment of exit — precisely when you have the least ability to address them.

Venture360's investigation into the SpaceX secondary market documents how SPV-upon-SPV structures are being used to sell interests where verified equity may not exist at the bottom of the stack — and explains exactly what questions investors should be asking before committing capital.

How we work to avoid it: We write a provenance of interest memo for every transaction. They are very simple when you are going directly on the Cap Table. They become more complex for single and double layer SPVs which may be required to access some of the largest and most sought after assets. This memo traces the ownership chain from the underlying company all the way through every structural layer to the seller, and documents the evidence supporting each link in that chain. We look for documentation like executed subscription documents, capital call notices, capital account statements, fund-level side letters, and GP confirmations that collectively establish that each link in the chain is sound.

We also assess the seller's legal rights — not just their economic ownership — and we identify and evaluate any gaps in the documentary record. Some gaps are explainable and mitigable, especially in the context of market norms. Others are not. When the chain of title can't be established to our standard, we don't transact. 

Mistake #5: Investing in a Bad Deal (You Don’t Understand)

The final mistake is in the documents. By the time a transaction has been evaluated on company quality, pricing, counterparties, and asset provenance, there's a natural tendency to treat the legal documentation as a formality. Investors have formed their view. The seller knows it. And in a market where transactions move quickly and documentation is often seller-friendly, the legal structure of a secondary can impose meaningful risks that weren't visible in the earlier stages of evaluation.

Areas of concern in secondary transactions are: reps and warranties; indemnification provisions; carry structures that are more complex or burdensome than initially understood; redemption mechanics or transfer restrictions that create exit risk; and governance provisions that limit investor rights in ways that only become relevant under adverse scenarios. None of these is necessarily a deal-breaker, but all of them need to be understood and accepted explicitly, not overlooked.

Klarna is a useful illustration: investors who bought secondary shares at its $45.6 billion peak valuation in 2021 saw the company IPO at $15 billion in 2025 and were then subject to a 180-day post-IPO lockup before they could exit. At that point, the company’s market cap was down to around $5.5 billion. It is a critical reminder that when you underwrite a deal, it is important to take into consideration redemption mechanics and transfer restrictions could materially impact the actual outcome.

How we work to avoid it: We write a legal review memo that assesses the actual transaction documents — share transfer agreements, relevant limited partnership agreements, side letters, and other governing documents. We're asking: what do we actually own, legally? What protections do we have? What are the exit mechanics, and what controls those mechanics? How do fees or carry work, and is it structured the way we understood it to be? What representations is the seller actually making, and what do they conspicuously omit?

This memo also produces a risk assessment and identifies open items that need further investigation or that need to be resolved before closing. And it is, like the other memos in our process, a genuine gate: where we are not comfortable with the legal structure or are not able to clearly understand the business risks, we do not proceed.

Why the Framework Matters

The five memos represent five independent ways to stop a deal. And each of them has killed a deal or sent us back for more information, on various deals we have considered.

A transaction that clears the company analysis stage can fail on pricing. A transaction that works on both company and price can surface problems at the counterparty stage that cause us to dig deeper or to walk away. A structurally clean deal can fail the provenance test. And a transaction that passes all four of those gates can still have legal documentation that contains undisclosed terms or unacceptable risks.

The value of a systematic approach isn't in the memos themselves. Instead, it's in the discipline of treating each risk vector as a real hurdle rather than a formality. Secondary venture markets are efficient in a specific way: they make it easy to buy exposure to companies that are genuinely good. But, they are inefficient in others and what separates disciplined investors from the rest, is the ability to pass on deals where the company is compelling but the other four elements don't hold up. We work every day to continue to refine our approach to drive risk down (though we know it will never reach zero).

These five mistakes are real, and they're each capable of turning what looks like a good opportunity into a bad outcome. These five memos – and the process behind them – are our systematic effort to make sure we reduce our risk of making them.

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IMPORTANT DISCLOSURE This content is published by PrePublic Equity Partners ("PEP") for informational and educational purposes only. It does not constitute an offer to sell, or solicitation of an offer to buy, any security. No such offer or solicitation is made except by means of a confidential Private Placement Memorandum or other definitive offering documents delivered to eligible investors only. PEP is not a registered investment adviser with the SEC or any state securities regulator. Nothing in this article should be construed as personalized investment, financial, legal, or tax advice. All views are the opinions of the author as of the date of publication and are subject to change without notice. Private market and pre-IPO investing involves a high degree of risk, including illiquidity, potential total loss of principal, and reliance on unverified private company data. Past analytical observations are not indicative of future results. PEP and its affiliates, officers, or employees may hold financial interests in companies discussed in this article. PEP reserves the right to buy or sell such positions at any time without notice. PEP does not receive compensation from issuers mentioned in its research. PEP is an independently operated subsidiary of Alumni Ventures, LLC.