A founder needs cash, believes the business has more room to grow and does not want a discounted share sale to reset the company’s valuation story. For Sam Lawson, managing partner at secondary buyer Flywheel Capital, that is the starting point for a structured liquidity solution. In this first The Inside Scoop series, Lawson explains where Flywheel invests beyond the most heavily traded private companies, how it balances shareholder liquidity with investor protection, and why better underwriting and clearer explanations matter as venture secondaries expand.
What is Flywheel’s role in the secondaries market?
Sam Lawson: Flywheel is a structured secondaries investor. We provide structured liquidity solutions primarily to founders, as well as investors and other shareholders in private companies, through structured financial instruments. Generally, this allows them to obtain near-term liquidity with additional benefits: retaining long-term upside, addressing issues around price setting and managing incentive alignment at the company level.
It is also a way of dealing with many of the inefficiencies you see in private markets. Secondaries are a great solution, but they do not fit every scenario. We use structured solutions and draw from different parts of the market to solve those problems.
For our investors, using structures drawn from different parts of the financial markets allows us to provide a more tailored risk-adjusted return, differentiated from other solutions and investment firms in the market.
We have been around for three or four years and have made a number of investments in growth-stage and late-stage private markets. We tend to invest from Series C onwards. Ultimately, the companies we invest in, directly or indirectly, tend to be leaders in their markets, with several hundred million dollars in revenue, strong operating cash flow, strong balance sheets and near-term liquidity on the horizon. Those are the businesses we like to focus on.
Why focus on Series C onwards, in the space between earlier-stage venture capital and private equity?
It takes some definition to answer that. In PE secondaries, you are dealing primarily with diversified positions in funds, LP stakes or GP stakes, and the underlying assets are primarily buyout businesses. The risk is lower, the return tends to be slightly lower, but there is strong diversification and a cash-flow profile over time.
VC secondaries, in my mind, sit at the earlier stages: Series A, Series B and perhaps some Series C. You are looking for stronger upside and a strong discount, rather than immediate, near-term cash flow. You are looking for capital appreciation over time. There is more inherent risk because these businesses are at an earlier stage.
What we noticed was that once a business reaches a certain level of maturity, before it necessarily reaches the private equity stage but after it has gone through that “valley of death” period, there are people in great companies who hold a lot of value and need liquidity.
By Series C, D or E, these companies are complicated beasts. They have complex cap tables and their own idiosyncrasies. We want to provide a structured solution that allows shareholders to retain the upside they expect from the company’s ongoing growth, without disrupting its equity story through a secondary sale. It can also allow them to unlock liquidity and reinvest in earlier-stage businesses.
We saw an underserved part of the market with a lot of complexity. That is the key point: complexity that cannot be solved simply through a straightforward secondary transaction. That is why we focus there.
What kinds of complexity are particular to this stage?
One example is the company’s cap table and its preferences. We recently looked at a company with several layers of preference, each with a different priority and different liquidation preference levels.
If you are coming in to acquire common equity, it is difficult to do so without applying a significant discount because of the risk. That discount may not be acceptable to the founder because of what it signals about the company and its common equity.
The founder may also think: “My company is going to be worth a lot more in the future. I need some liquidity now, but taking a big discount and losing that opportunity is not for me.”
We can apply, for example, a preferred equity solution that gives us downside protection through overcollateralisation of the shares and allows us to advance a certain amount of liquidity against them.
There is no disruption in terms of price setting. We receive the downside protection we need against that large preference stack, and both sides can move forward with a liquidity and investment solution that works for them.
Different jurisdictions also have their own idiosyncrasies. You might try to provide liquidity to someone and create an adverse tax situation for them. There are other ways to structure that liquidity so they can obtain some cash in the short term without necessarily disrupting their whole tax strategy.
Which markets are you focusing on?
We work across the US and Europe. We are based in London and Amsterdam, so naturally we spend a lot of time in the European market. My background was in the US, and we spend a lot of time there as well. I would say the split is around 50–50.
I would extend that geography a little further to include Israel. We have found it to be a strong technology market, with great companies originating there, and we have worked in that market too.
How is the opportunity for Series C-plus secondaries developing in Europe? Is Europe still catching up with the US?
I would give Europe a little more credit. Ultimately, yes, there is a story of the US exporting capital markets innovation to Europe. Separately, there is a story of private equity passing on some of its learnings to what I like to think of as its younger brother: venture capital. But VC moves quickly and, like any new generation, tends to pick things up quickly too.
What we have seen in PE secondaries filtering into Europe is moving into VC secondaries much faster than you might have expected a generation ago. Great companies in Europe are also adopting liquidity initiatives more quickly.
There are several different parts of the market. When people think about VC secondaries, pre-IPO secondaries or private markets, they tend to think of the top 20, 25 or 30 names: companies that are heavily traded or much more liquid in private markets, such as Stripe and OpenAI. That is just as true in Europe. Revolut is a good example.
I see this as an international market. The pre-IPO market is not necessarily just the US, although many of those companies are there. Below the surface, beneath the tip of the iceberg, there are many high-quality companies that, for whatever reason, do not yet have the same level of liquidity. That is true in both Europe and the US.
There is probably a little more risk tolerance in the US, which allows for structured solutions and is good for us. But in Europe, we are seeing more companies move above that waterline. We are seeing tender offers, recurring liquidity events and a lot of demand. Beneath the surface, there are just as many companies looking for liquidity that cannot obtain it through traditional broker groups.
Who are your LPs, and how do you explain a strategy that sits across different parts of the market?
I certainly think our LPs understand what we do; otherwise, I would be worried about them investing with us.
Our LPs come from a wide range of backgrounds. Where we invest sits between straightforward equity and straightforward debt. We move across that spectrum, so our LPs tend to be sophisticated, thoughtful and looking for a specific type of risk-adjusted return that we can deliver.
Sophisticated investors can come from anywhere. At one end, we have institutional investors: funds of funds, credit-adjacent institutions and private equity-type institutions. At the other, we have private investors, including people who have backed us from the beginning and founders who have built great companies and established their own investment vehicles. They are just as sophisticated and understand what they are doing.
Across the spectrum, there is a general understanding that we are doing something different and delivering a specific risk-adjusted return that they cannot otherwise find elsewhere for their portfolios.
Who is typically on the other side of your transactions: founders, early employees, angels or funds?
Our roots were with founders. That was the light-bulb moment for us.
After a long period working in private credit and private equity in the US, I moved into venture there and then came to Europe to work at Crowdcube and build out the secondary platform.
We were trying to create liquidity for founders who had used Crowdcube or worked with us in the past. We found it difficult because we kept running into these inefficiencies: founders unable to sell at a discount because of the equity story, founders wanting to retain their upside, and the need to keep them incentivised to drive growth rather than simply take their chips off the table. Boards were thinking about that too.
We started by focusing on founders, and some of our first investments were with some of the best founders around. We were fortunate to have Darren Westlake, our third partner at Flywheel and the founder of Crowdcube, and the relationships he had built over a long period in the market. We found our solution to be particularly well suited to those founders.
Over time, we realised it could work for other participants: GPs looking for liquidity across a portfolio or in a single asset, LPs in single-asset funds and, to some degree, angels, early investors and employees.
Because we primarily focus on single companies rather than broader portfolios, we have to do proper equity underwriting on the asset. If we do not have the information we need or cannot get comfortable, it becomes difficult to do the deal. Once you get too far removed from the underlying asset, with SPVs on top of SPVs, that becomes very difficult for us.
We can provide solutions across the market to people who want liquidity now while retaining upside through a structured arrangement. The fragmentation of the market is exciting. For a long time, private markets felt like a cohesive whole in which only a few people could participate. That is starting to break apart in a positive way. There are different corners of the market, different inefficiencies and different personal situations where we can help.
At IPEM, transparency was a recurring theme. How do you obtain enough information to underwrite companies beyond the trophy names, and how do you communicate that information to LPs?
That is your job as an investor: you have to make sure you are not choosing bad companies. Whenever we invest, we start with equity underwriting. Before we get to the structure or to solving a problem, we look at the assets.
We spend a long time looking across the market at the assets we want to invest in. You have to decide which companies you want to invest in and find enough information to make that decision. Fortunately, if you know where to look, there is more information available than you might think, especially in Europe, through public registers and so on. You can gather enough to at least qualify an opportunity.
We do not invest in poor performers. It does not make sense for us or for the person we are providing liquidity to, because that person remains incentivised by the long-term growth of the asset. This is not a loan-to-own strategy.
We have to do good underwriting, and everyone has to do good underwriting. Other strategies have a place in the market, and people execute them very well.
On the broader transparency question, I do not think you can expect the same level of transparency in private markets as in public markets at this stage. Private companies are private for a reason. They do not want to disclose all their competitively sensitive information to the market, and they are not necessarily ready to do so.
They want supportive partners who are incentivised by the growth of the business to the same degree they are. That is how we position ourselves. You have to be a good manager, get close to the asset and provide value to the underlying company. Our structured solution has to do that so we can receive good information and report it to our LPs.
When we report to our LPs, we probably go into too much detail. They are probably tired of the amount of information we give them about the fund, portfolio companies, valuations and structures. Partly, it is an educational process. We think it is important that investors understand and support what we are doing, and it is the right thing to do. I imagine most managers provide their LPs with good information; we are one of many.
Does the industry need to do more to explain secondaries as the market reaches a broader investor base?
I do not know who everyone else’s LPs are, but I understand the point. Secondaries is not necessarily one cohesive market.
Someone talking about secondaries might mean PE secondaries: buying LP positions and expecting cash flows over time. Someone else might mean VC secondaries: buying a discounted position in a Series A or B company, perhaps some early preferred equity. Those are very different investments.
Part of the answer may be better terminology and more education about the different types of investment within the secondaries bucket and what investors should expect. Part of it will come with time, as people invest, see the returns and understand what those products do.
Education is important in any new or relatively new asset class. What we do is quite complicated because we borrow financial instruments from different corners of private and public markets and reshape them to meet a new need. We spend a lot of time explaining that.
Should there be more education about secondaries generally and how they differ from other asset classes? Perhaps. That brings me to the relationship between secondaries and primary investing, specifically in VC. I have said before that I think every VC investor will be a secondaries investor in the next 10 years.
Why do you expect every VC investor to become a secondaries investor?
In two ways. First, if you are buying straightforward direct secondaries in a company, you are underwriting equity. There are different procedural elements, rights of first refusal and preference stacks to consider, and you do not necessarily have the same protections as traditional preferred equity.
Ultimately, though, you are buying equity in the same company. If you are a primary investor and are not taking advantage of secondary opportunities on your cap table as they arise, at a good price in a good company, you are missing an opportunity. Good primary investors have been doing this for decades.
That will continue, and we will see more of it. I am sure specialist investors doing straightforward, pure secondaries will also start doing primaries.
Second, VC investors will increasingly use secondaries to manage their portfolios, through partial sales of positions or participation in tender offers.
But venture returns can depend on one company out of ten. Does more secondary selling risk changing that model? Another investor recently told me: “There are no bad assets, only bad prices.” Do you agree?
You are not going to find a buyer for everything. I think I know whom you are referring to, because I have heard them say it.
Without being pejorative, there are assets it does not make sense to buy at any price, especially in VC, where the whole premise is that some companies will fail. Catching a falling knife does not make sense. I do not agree 100%, although I understand where the person is coming from.
If you buy a diversified position with one winner and nine losers, and that winner is sufficiently successful, buying an LP position in that fund could make sense. It depends on the level at which you are looking.
More liquidity overall is a good thing because it creates the flywheel effect: more investment, more liquidity and more growth. That is what you want to see.
How do you see the market evolving across those different stages?
We have seen attempts to create liquid markets for very early-stage private stock. I do not think that will necessarily happen.
At the later stages, among those top 20 names, I think we will see an increasingly efficient market. It will not just be individual stocks trading. We will see ETF-type products, index funds, interval funds and derivatives around those companies.
The next layer is where we can add a lot of value. Although we also invest in those more liquid names, much of what we do sits just below the waterline: companies that are almost there, but not quite. You do not have the same efficiency, so structured solutions and securities work very well.
At the earliest stages, a public-style market may not be appropriate yet, but other products might be: insurance-type products or exchange-fund-type products, for example, through which founders share risk. We have thought about those in the past, although I am not sure exactly how they are doing at the moment.
There are different structures within this broader liquidity and securities universe that can provide more liquidity, help people take more risk and encourage them to invest in these assets in the first place. Different stages need different solutions.
At the most liquid end, there may be very fast trading and perhaps quantitative strategies at some point. Below that, there is a place for more thoughtful, considered structured solutions and more traditional private markets or private equity thinking. At the earliest stage, it is still venture in my mind, but there is no reason structured solutions cannot work their way down there.
Ultimately, we will see more innovation. In my view, that is a good thing, but we will see.
As participation broadens, how important is specialist experience?
That is why you need specialists who invest in this market and have done so for a long time. There is a lot of activity at the moment, including private individuals investing in private companies, which may or may not be appropriate. There is still a strong place for a specialised manager.
When I go to conferences and speak to people at 0100, I find smart people who know what they are talking about and are interested in the market. Perhaps that shapes my perspective.
Outside that specialist audience, there is still work to do, particularly in bringing more European family offices and private investors into the conversation. How can the industry make its case more clearly?
I take your point. It is about education and explaining the opportunity, which happens with any new asset class. You need to show returns, demonstrate how it can be a suitable, different allocation within a portfolio, and explain what it is.
Even the smartest people in the room respond better to a simple, easy-to-follow example or story. Perhaps people need to get better at explaining what they do. I am guilty of doing that badly myself.
I read about secondaries every day while building Secondary Scoop, and even I can get lost in the terminology. One common shorthand is that secondaries means buying at a discount. What is your view?
Discounts are a good way of explaining what secondaries are, or perhaps what they were until relatively recently. Nowadays, quality assets are priced according to supply and demand, and often you do not see discounts beyond that.
What are you discounting to? We assess investments based on fair value. Are you talking about a discount to fair value or to the last funding round? How does fair value compare with that last round?
When VC equity markets were as simple as a Series B, C or D round, talking about buying at a discount made sense because that was the only valuation mark available. Now there are more marks and more price transparency, even if pricing is not continuous.
The analogy is a little dated. It does not make perfect sense, although it is an easy explanation. If you are buying a different share class, you may be paying a discount to the headline company valuation, but that class may be worth less because it has different rights and privileges from the classes above it.
You raise a good question: how do we simplify the narrative around secondaries? At the PE level, it is relatively straightforward to explain. At the VC level, you are still investing in venture capital: being a good investor and buying at a good price relative to what you think the asset is worth.
