The Hidden Depths of the Primary Market

By Qian Ren

Edited by Jing Liu

The Era of Existing Assets

Everyone was chasing the same company.

"I heard you recently closed a deal — any allocation left?" In the span of a single week, a primary-market intermediary received three separate inquiries, all targeting ByteDance.

It was the summer of 2021. Secondary-market quotes for ByteDance had already surpassed $400 billion — roughly equivalent to the peak market caps of Alibaba and Tencent combined. Yet the buyers kept coming.

According to Anyong Waves, one family office, seeking $200 million in existing shares, offered "any price, as long as we can trade immediately." A well-known US hedge fund wanted $300–500 million equivalent in ByteDance shares, "hoping to close within a month." And a Hong Kong fund set aside $1 billion for ByteDance, going so far as to post proof of funds and a letter of commitment through an intermediary to demonstrate seriousness.

SHEIN enjoyed similar treatment. Most people had only learned its name about a year prior, but by the time this company — seen as a Zara rival with annual revenue exceeding $30 billion — caught their attention, its valuation had already hit $15 billion. According to Anyong Waves, even before SHEIN's much-rumored "$100 billion valuation" funding round, existing shareholders had been selling old shares at valuations above that threshold.

At this point, the primary market was nearing the peak of its two-year euphoria: Qichang data showed 4,021 financing deals completed in the first half of the year, totaling 1.7058 trillion yuan — a record high since 2018.

The past two decades of Chinese venture capital history have been stitched together from one financing story after another. For internet companies especially, external funding has been a nearly unavoidable commercial path. Didi, once dubbed a "fundraising machine," raised capital at least 23 times since 2012, absorbing $25 billion. Meituan's total fundraising also exceeded $20 billion.

But this is only the surface glamour of the VC industry. Beneath the water lies a different kind of turbulence.

When a high-quality primary-market company has no near-term prospect of a new funding round, investors eager to deploy must find another path: buying existing shares. The ByteDance and SHEIN transactions mentioned above, while not a new form of deal, typically occur quietly, unknown to most.

Sometimes even unknown to founders. One institution once acquired shares in Genki Forest through a secondary purchase, then publicly claimed to have invested in the company. This led Tang Binsen, in a subsequent funding round, to require investors to sign an additional clause stipulating that the investing entity must be their own fund.

For individual companies, these transactions may seem sporadic. But for the primary market as a whole, the dense clustering of such deals was inevitable.

To date, Chinese business has produced over 160,000 companies with funding histories, yet most will never reach IPO or M&A exit. In a primary market without public liquidity, secondary share transactions represent a reallocation of assets and capital — the third path for investor exits.

If company shares need to flow, so too do the funds themselves.

ZERONE data illustrates this: Hongshan, for example, has invested in over 1,300 companies, but as of now has only about 160 listed or pre-listed companies (excluding those already delisted) — roughly 12%. This is partly inevitable: the logic of USD funds is to make concentrated bets on single breakout projects across different sectors. In June of this year, Hillhouse Capital also publicly stated that S funds are part of its new strategy, with a team being assembled and plans to sell and acquire assets through secondary transactions. And if we take 2014's "mass entrepreneurship and innovation" wave as the starting point for most funds, the vast majority are now approaching their final exit deadlines. In short, fund exits are a massive undertaking.

The founder of a Beijing-based secondary transaction intermediary still remembers a scene from two years ago: on a sweltering afternoon, she arrived at a top-tier firm's office carrying a bag of freshly printed materials. An investment manager led her to a conference room, and within 15 minutes, simply pointed: "The door is behind you." But today, "all top-tier funds are probing the possibility of selling assets."

The era of existing assets in the primary market has begun.

The Hidden Agenda

In the first half of 2020, Wang Jun, working at an investment institution, was approached with an asset package containing roughly 30 projects. Most looked unremarkable, but one stood out: a single unicorn accounted for 20% of the package's total value. At the seller's pricing, this unicorn was valued at just over $70 billion — yet its market price at the time was double that, with projections of a post-IPO market cap exceeding $200 billion.

Wang Jun was determined to win, but he wasn't the most competitive buyer. In the second half of the year, when the exchange announced the unicorn's IPO review, "the seller's phone exploded that same night." Wang Jun later learned that dozens of potential buyers had been watching. To secure the package, some transferred money overnight without even signing agreements. In the end, despite having cleared his own IC (investment committee), Wang Jun failed to secure the allocation.

This was a textbook secondary transaction. Textbook in its failure.

Despite the secondary market's apparent bustle in recent years, actual closed deals have been few. According to Guangchen's statistics, from Q4 2020 to the same period in 2021, domestic secondary transaction volume reached 32.114 billion yuan, involving 322 funds. Domestic secondary market transaction volume has grown continuously since 2013, with a compound annual growth rate of about 41.4% — a breakthrough built on the steep rise in existing asset scale and the surge of buyers such as financial institutions and state capital entering the market. But at the micro level, USD secondary funds like LGT Capital review dozens of asset packages in China annually, yet their elimination rate exceeds 90%.

This low success rate stems partly from the industry's early-stage immaturity, where many issues lack consensus.

One secondary fund partner encountered an oil company that, having invested in a traditional Chinese medicine CRO company unrelated to its core business, was desperate to sell quickly. Before even beginning due diligence on project fundamentals or valuation levels, it first demanded that the partner "make up for years of management fees." Another well-known real estate investment firm this year set a company-wide KPI — dispose of 50% of assets within a set timeframe — but with no clarity on who would sell or how, leading to internal turf wars between different teams and zero closed deals over half a year.

A more fundamental reason may be: this is a highly non-standardized market. All transactions involve uncertainty — or rather, uncertainty itself can be a source of profit for transaction parties. But the reason uncertainty in secondary transactions is so exceptionally high lies in the randomness inherent to the market itself.

Relatively speaking, primary financing is more standardized: relatively clear targets, relatively clear buyers (fund preferences), and relatively clear intermediaries. Secondary transactions combine all "non-standard" factors — numerous and uneven targets, unclear buyers, difficult pricing, and volatile seller psychology.

"Policy adjustments, sudden spikes in asset value, shifts in seller mentality, pressure from competing buyers — any of these can paralyze a secondary transaction overnight," Wang Jun told Anyong Waves.

This was the most common story we heard in interviews. A secondary fund established in 2020 witnessed one case: a hot new energy star project where an LP wanted to transfer their stake through a single-project fund. The LP had initially agreed to the transfer and price was settled, but the process required GP cooperation. Simply because the GP was busy raising a new fund and delayed for two weeks, the project suddenly received major positive news, the LP's mentality instantly shifted, and the deal evaporated.

"Non-standard" characteristics extend beyond technical transaction layers. The most elusive aspect of secondary transactions may be: the drinker's heart is not in the cup.

Liu Jiawei, managing partner of Bozun Capital, discovered after reviewing over 30 asset packages this year that many GPs selling assets weren't actually seeking liquidity — they were using it as a fundraising method. Their typical approach: find a small secondary stake in a previous fund as "bait," then persuade LPs to invest in their new fund.

"We see a great company, and there happens to be old shares at a discount, but when we ask, they say no — you need to invest 1:1 in the GP simultaneously. This is extremely common," one practitioner involved in such transactions told us. "For these types of deals, whether old shares or secondary stakes, they can be understood as new fundraising tactics. But for LPs, it's two separate calculations: the secondary stake needs a financial accounting, while the blind pool portion requires evaluating GP management capability — often making transactions very complex."

This bundled transaction logic resembles "Hermès quota" — I'll sell you the asset package, but you need to allocate some money to a new blind pool fund.

Such arrangements have succeeded. In 2020, Kunwu Capital packaged seven projects and sold them to TR CAPITAL's offshore entity, involving approximately $100 million. Through this secondary transaction, Kunwu Capital achieved partial RMB asset exit while completing fundraising for its first USD fund. Buhuo Ventures similarly completed an RMB-to-USD fund restructuring transaction exceeding $100 million.

But such cases have since virtually disappeared, because the more important prerequisites are: the assets themselves must be sufficiently high-quality, fairly priced, and capable of generating strong DPI through secondary transactions — these are the fundamentals of fundraising.

IDG Capital's case largely proves this point. In 2020, IDG Capital sold the stake in its first RMB fund, established in 2010, to HarbourVest and LGT. The NAV of these asset combinations exceeded $600 million, involving over 10 projects. One buyer's post-mortem of why this transaction succeeded identified many necessary conditions: first, IDG Capital is a high-quality GP; second, detailed due diligence on the assets themselves, with projects showing good growth potential; third, fair pricing based on underlying assets — "the right time, place, and people — not a single step could go wrong."

"Every secondary transaction is different, impossible to generalize. Because the transaction attributes are so specific and the asset categories are non-standard, the demands on transaction technique are extremely high, with dense difficulties at every step," Liu Jiawei believes. No single party can cover the entire process alone.

Of course, GPs' reticence also relates to potential misunderstandings about secondary funds. In earlier years, major US GPs also tended to avoid association with secondary funds, lest they be tagged with a "distressed" label. This mentality is widely shared among Chinese GPs. The most common response Anyong Waves received in interviews: "We did complete the transaction, but the GP requested low profile, absolutely no publicity."

The Fundamental Contradiction

If a perfect transaction is win-win, then in secondary transactions it may never be possible.

In a primary financing round, participants share aligned goals: the company performs well, the GP earns returns, and the LP profits accordingly. But secondary transactions contain an irreconcilable contradiction: sellers want to bundle and offload inferior assets, while buyers only want to cherry-pick the top assets. "It's about making counterintuitive money amid disorder," one secondary fund partner says. The essence of secondary transactions is game theory.

One very active secondary fund once received an asset package: on the surface, over 60% of projects were listed or approaching lock-up expiration, with high liquidity and favorable pricing. But during due diligence, they discovered several projects had limited floating profits — "considering the five-year duration, annualized returns wouldn't even reach 10%."

A domestic secondary fund partner told Anyong Waves that among sellers he has encountered, most lack clear awareness of their own asset conditions and pricing. "First, regardless of how tight their cash flow is, they demand mandatory pricing; second, they're impatient, wanting to sell today and sign and transfer tomorrow; third, they have no concept of transaction process or pricing."

Buyers, as another partner describes them, are extremely fragmented with many unqualified participants. Beyond long-established foreign secondary funds, marketized funds of funds employing PSD strategies, independently operated secondary funds, and financial institution buyers like banks and insurers, China's market also has many unconventional buyers: listed companies, unlisted enterprises, family offices, high-net-worth individuals, even some financial advisors.

Starting in the second half of 2021, financial institutions, bank wealth management subsidiaries, and securities firms entered with substantial capital. According to observations by Li Miao, founder of ZERONE, unlike foreign secondary funds, domestic secondary funds prefer medium-scale LP stake transactions while focusing on alignment with core business and cash return speed. This also means "their requirements for assets and grasp of rules involve extremely different cognitive gaps."

Some emerging domestic secondary funds have achieved modest success. For example, China Everbright Limited's first secondary fund, established in June 2021, completed two transactions this year with overall paper gains of about 50%; and Shanghai Industrial Shengshi Secondary Fund I has already distributed returns to LPs nine times over the past two years. Yet despite this, among all secondary funds Anyong Waves visited, such results belong to a minority — most have stumbled in the transaction process.

Whether company secondary share transactions or secondary funds, they typically revolve around funds, and such transactions seem cursed with slowness. Anyong Waves has expressed similar views: in the business world, investors (GPs) occupy a transitional role, positioned between companies and LPs, which makes GPs more prone to slow decision-making paralysis. Thus many changes in the fund industry are delayed. This is vividly demonstrated in secondary transactions.

In the secondary fund ecosystem, participants typically include: investment institutions (GPs), capital providers (new and old LPs), underlying assets, and intermediaries — four parties. In primary investments, founders unquestionably hold decision-making power, but in the era of existing assets, GPs are the most critical gatekeepers throughout the chain.

If we compare companies to real estate properties, it's like buying a house where the buyer never meets the owner — making trust-building difficult. For secondary fund transactions, as Geng Xiyu, founding partner of Guangchen Advisors, notes, a GP's back-office data capabilities, awareness of information disclosure scope, and the key person's emphasis on exits all directly impact buyer decisions.

For Shanghai Industrial Shengshi Secondary Fund, for instance, the GP is also a crucial stakeholder. The team must reach preliminary consensus with the GP on stake transfer and fully communicate with those in the fund who have decision-making power over asset disposal before substantially advancing to the next step.

China Everbright Limited's secondary fund similarly states that without the GP's explicit agreement to transfer the secondary stake, they absolutely will not proceed, because "unless you have inside knowledge of what the GP is thinking, many transactions that seem to be progressing will stall for inexplicable reasons."

Therefore, the core of successful secondary transactions is: GP resolve.

Returning to IDG's secondary restructuring case. IDG's asset package had NAV exceeding $600 million, including over 10 projects, with pricing being the most critical element. Unfortunately, the sudden COVID-19 outbreak in Spring 2020 forced a halt. When restarted months later, all assets required re-due diligence and repricing, nearly killing the deal. To ensure the asset package transaction's independence and optimal pricing, IDG introduced an independent third party to lead the bidding process. Ultimately, over a dozen USD secondary funds submitted bids, with the buyer determined through two rounds of competitive bidding.

A buyer involved in the transaction told Anyong Waves, "At the time, the IDG team and major sellers had clear intent to complete the transaction — this was the most important prerequisite for successful advancement."

Looking across China's entire secondary transaction market, even this element of "resolve" is quite rare. The head of a Shanghai asset disposal intermediary once described investment institutions' vacillation in selling assets as "incredible," including top-tier firms: from the decision to sell, for months on end, different teams operated independently, "with no top-level exit design or clear exit strategy."

Return to Realistic Narratives

In early 2020, just before Pop Mart completed its pre-IPO round at a $2.5 billion valuation, early investor QiFu Capital brought an asset package containing the project to market for limited sale. The institution where Liu Jiawei then worked was determined to buy.

Within a year, Pop Mart completed a new funding round and listed in Hong Kong, with peak market cap approaching HK$150 billion. Pop Mart alone generated substantial DPI for this investment — far ahead of what primary-market investment institutions could typically achieve. This gave Liu Jiawei insight into the vast market potential of secondary transactions, making them the core strategy for his founding of Bozun Capital.

But does this mean secondary returns are sufficiently high? Liu Jiawei told us the Pop Mart case is an outlier. "Overseas secondary returns are generally 5-10% higher than primary (blind pool funds) — you still need to find a good safety margin."

The US secondary transaction market is highly fluid and active; in 2021, global secondary transaction volume first broke the $100 billion threshold, reaching $126 billion. Yet according to Guangchen data, China's secondary transactions totaled only 32.1 billion RMB — though this already represented 21.6% growth compared to the same period in 2020.

For years, secondary funds have remained marginal in China: taking root around 2010, entering niche visibility in 2018 alongside the rapid heating of China's PE secondary market, and being crowned "saviors of the primary market" in 2020. But before that, beyond occasional media appearances by foreign secondary funds managing billions or tens of billions of USD, domestically established secondary funds were mostly hollow: opportunistic in mindset, unable to raise capital, some never completing a single transaction.

Zero2IPO once surveyed over 400 institutions and 1,500 funds on investment return multiples and DPI from 2011 to present. Results showed only 2011 and 2012 funds achieved DPI above 1, with ten-year fund medians only recently breaking even. According to PitchBook statistics, using an average 4-5 year investment period, 2018-2020 US VC/PE exit totals were approximately $4 trillion, while 2014-2016 total investments were $1.6 trillion. This implies US overall investment return multiples exceeded 2x.

Fundraising gaps between Chinese and foreign secondary funds are also massive. Coller Capital statistics show secondary fund fundraising in 2019 accounted for roughly 5% of the primary market globally, while domestic secondary fund fundraising accounted for less than 0.2% of the entire market.

Amid this vast market space, the relationship between Chinese LPs and GPs has also changed. More LPs want to control their own fund stake exit options. More critically, GP attitudes have shifted in recent years — from initial disinterest to active deep involvement, initiating transactions as sellers. This of course requires GPs to mentally accept that "not all investments succeed."

When both sides return to realistic narratives: what is a company actually worth? There seems never to be a correct answer. Over 20 years of Chinese VC/PE development, project valuations have typically only risen round after round, with virtually no correction mechanism. But secondary share and secondary transaction markets provide a new value benchmark.

For example, Anyong Waves has learned that some investors are currently offering to sell ByteDance shares below a $270 billion valuation, with some even quoting $25 billion; last year's "it girl" Genki Forest reached a $15 billion valuation at its peak, but an early investor recently offered to transfer old shares at $8 billion — a price some buyers still consider slightly high. It should be noted that secondary market fluctuations are typically far more dramatic and frequent, with final closing and prices shifting moment by moment.

Liao Kun of ShiXiang Technology mentioned to us the concept of "Mr. Market." Originally a parable by Benjamin Graham, father of security analysis, it warns that the stock market is one of alternating fear and greed, where people's emotions swing wildly with rises and falls, making rational judgment difficult. Some companies see secondary share prices drop 90% in a year, while intrinsic value certainly cannot change so dramatically in such a short time.

As a "secondary market within the primary market," the secondary fund industry fits this theory well: "Mr. Market" quotes you a price every so often, and you buy when you find it reasonable.

This means when markets surge, secondary transactions grow frenzied; once markets decline, secondary transaction collapses arrive like tsunamis.

(At the interviewee's request, Wang Jun is a pseudonym.)

Image source | Visual China

Layout | Guo Yunxiao