Company lifecycle and the need for liquidity

Knowledge Base
Wednesday, June 16, 2021

There are many theories on company lifecycle and the various stages of growth and decline.

What they all have in common are the start-up and growth periods where new funding is going into the business and, much later, the “maturity period” where the company goes public, declines, or exits to begin rebirth.  

In the beginning, investment is going in, and at the end investment returns are coming out. What will surprise most people is the length of time between investment and return. Is it three years? Five years? It is more like eight to ten. That is the average age of companies that go public in the UK.  

Very little attention is given to shareholder liquidity and investment returns between the start and the exit, but liquidity is vital to investor returns and the evolution of the shareholder base to support the company in its next phase. The early angel / VC investors aren't going to be the best investors to support it through to IPO. They have played their part early on and will look to recycle their capital into new early-stage opportunities. The later-stage institutional investors that can support the IPO, cannot invest at the initial stages, and must wait to invest when it is “de-risked.”   

But what is liquidity?  

Perhaps the simplest and most common definition came from Keynes. He said one asset is more liquid than another “if it is more certainly realisable at short notice without loss.”

The key questions to ask, therefore, are:  

1. Can I sell it?  

2. How quickly can I sell it?  

3. What price can I sell it for?  

Often, one of these factors can be improved, but at the expense of another. An asset can be sold more quickly, for example, if the sellers are willing to accept a lower price.  

The availability of liquidity in an asset class means lower transaction costs, more frequent trading windows, and a clearing price that is more likely to reflect “fair value.”  

Liquidity is especially important to short term investors and traders, but longer-term investors can benefit from it as well.  

In some ways, being a longer-term investor represents an “edge” when investing; the longer one's time horizon, the more one can invest in illiquid and private company investments, the more value opportunities one can find.  

If the investment becomes more liquid (or at least less illiquid), the longer-term investor will benefit from a reduced discount to “fair value” should they decide to sell.  

The early-stage investor has taken the early-stage risk and locked in high return by selling to the longer-term investor. The later-stage investor is buying a later-stage investment and taking on the liquidity risk. They get a discount for this and benefit to the extent that liquidity improves, the company goes public or is bought out.  

They can both get what they want: higher risk, higher return for early-stage investors; and lower risk, lower return for later-stage investors.  

What is the role of Asset Match?  

Trading shares in private companies has historically been a difficult, costly, and time-consuming process. Potential investors must source buying opportunities themselves, and sellers find it difficult to find buyers. Exposure to private company shares has largely been the preserve of the few with direct access to the companies, or through private equity portfolios.  

Asset Match solves these problems by providing auction-based liquidity in private companies. By centralising liquidity and creating a competitive and transparent price discovery process, the Asset Match platform allows shareholders to realise some of the value of their investments and new investors to access new opportunities.  

You can find out more about the products that we offer on our website.