Investors are scrambling to get into the biggest private companies before the next IPO. 2 traders lay out what that means for the opaque secondary market.

<p>&nbsp;<img src="https://static2.businessinsider.com/image/5fd27e5e7b7e05001910742a-2400/AP20345532006614.jpg" border="0" alt="brian chesky airbnb ceo ipo nasdaq" data-mce-source="Mark Lennihan/AP" data-mce-caption="Brian Chesky, CEO of Airbnb, is shown on an electronic screen at the Nasdaq MarketSite, Thursday, Dec. 10, 2020, in New York. The San Francisco-based online vacation rental company holds its IPO Thursday."></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>Shares of private companieswhich don't trade on an exchange or offer immediate liquidity to their investorsshould come at a discount.&nbsp;</p><p>Investors are sacrificing their ability to get out of a position quickly and, in normal times, the price of the stake reflects that.</p><p>It is not normal times.</p><p>The <a href="https://www.businessinsider.com/why-ipo-pop-performance-airbnb-doordash-valuation-bubble-stock-trading-2020-12">exploding IPO market</a>dominated by names like DoorDash and Airbnbhas made an already-frenzied private market even wilder. Investors, from massive mutual-fund managers like Fidelity to hedge funds like Tiger Global to private equity giants, are desperate to own a part of the next big IPO before the company goes public.&nbsp;</p><p>"If I go back two, three years ago, you were able to buy shares in the last round for a 15% discountyou got paid for that liquidity risk," said Stefan Pollmann, head of private secondary trading at Williams Trading.&nbsp;</p><p>"Now, we have the unique situation where these growth companies have seen their value double over two or three months in the private markets, and then double again in the public markets."</p><p><em><strong>See more: <a href="https://www.businessinsider.com/airbnb-bets-for-mutual-fund-managers-fidelity-principal-2020-12">Airbnb's stock skyrocketed in its first day of trading. Here's how much massive money managers like Fidelity and Principal are up from their original bets.</a><br></strong></em></p><p>Pollmann's firm, founded by former Tiger Management portfolio manager David "Tiger" Williams, is mostly focused on executing public equity trades for its clients but has grown its presence in the private space through the secondary market, where founders, early investors, and more sell their stakes to investors who were unable to get into original fundraising rounds.&nbsp;</p><p>"Our biggest challenge right now is supply," Pollmann said, and for good reason. Hedge funds like Coatue, which had a stake in <a href="https://www.businessinsider.com/coatue-factset-fidelity-early-adopters-snowflake-data-exchange-2020-3">2020 darling Snowflake before it went public</a>, and D1 Capital, a big private backer of companies like SpaceX and Robinhood, have found that many companies are growing more in the private market than the public one. D1, founded by former Viking CIO Dan Sundheim, has made at least $1.5 billion off its private bets this year, <a href="https://www.businessinsider.com/dan-sundheim-profile-d1-viking-billionaire-net-worth-bio-performance-2020-10'r=d1-teaser">Business Insider previously reported</a>.</p><p>Uber and Lyft, with underwhelming IPOs in 2019, <a href="https://www.businessinsider.com/slack-employees-have-sold-stakes-in-the-company-private-market-2019-6">increased secondary trading at unicorns like Slack</a> because employees were concerned their shares wouldn't be worth as much in the public markets, but the red-hot IPO market in the second half of 2020<strong style="color: #ff0000;">&nbsp;</strong>has changed the calculus for buyers of these stakes.&nbsp;</p><p>People are comfortable paying premiums to get into the hottest companies now, said Reed Endresen, a vice president at Williams Trading who joined the firm this year Apollo to work on Pollmann's team. Private stakes that used to come at a discount to buyers are now being traded for 25% more than the valuation of the latest funding round.&nbsp;</p><p>"If it's a hot deal, you need a seat at the table, and it feels like the same guys in there every time," Endresen said about fundraising rounds.</p><p>"There's a lot of legacy hedge funds that aren't even getting that call."&nbsp;</p><p><em><strong>See more: <a href="https://www.businessinsider.com/doordash-investors-ipo-t-rowe-fidelity-pensions-initial-public-offering-2020-11">Here are the investors that are set for a windfall as DoorDash heads for an IPO, from asset managers like Fidelity to a retirement plan for Costco employees</a><br></strong></em></p><p>Beyond fighting with other funds that couldn't get into the primary fundraising rounds, investors in the secondary market are also competing with investors who want to add to their stakesand these investors have inside info on the company from their past investments, and are still paying a premium.&nbsp;</p><p>"The people that own these companies don't want to leave the easy 2x, or 3x on the table," Pollmann said.</p><p>The ripple effects of this surge in the secondary market are varied, but Pollmann believes the obvious ones are clear. There will be more liquidity, transparency, and eventually regulation for the space if this much money continues to whip around.&nbsp;</p><p>"It's very fragmented, it's not regulated. Everyone is in a rush for privates to trade like publics, but they're a ways away from that," he said. He said his firm's biggest selling point for clients is its history in executing trades in the public marketsthere's a level of trust for clients considering a private investment.&nbsp;</p><p>"All the big long-short hedge funds are playing privates at this point, and need to really," he said. "Companies are staying private longer, and [investors] don't want to wait for the IPO."</p><p>A robust secondary market will also make the massive day-one IPO pops that DoorDash and Airbnb saw more unlikely, Pollmann believes. There won't be as much, if any, money left on the tablea constant criticism of the banks <a href="https://www.businessinsider.com/analysis-amateur-traders-euphoria-leaves-red-hot-us-ipos-with-money-on-the-table-2020-12">that underwrite the public offerings&nbsp;</a>with more transparent price discovery in the private market.</p><p>It might even eliminate the need for a traditional, bank-led public offering altogether. Already, major companies like Palantir and Asana have gone public via direct listing, and the Securities and Exchange Commission <a href="https://www.sec.gov/news/openmeetings/2020/ssamtg121620-open.htm">is voting this month</a> on a New York Stock Exchange proposal that would make direct listings <a href="https://www.businessinsider.com/nyse-direct-listings-plans-sec-investors-protection-legal-concerns-2020-9">more attractive</a>.&nbsp;</p><p>"My guess is that we will see a direct listings spike," Pollmann said.&nbsp;</p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/airbnb-bets-for-mutual-fund-managers-fidelity-principal-2020-12" >Airbnb's stock skyrocketed in its first day of trading. Here's how much massive money managers like Fidelity and Principal are up from their original bets.</a></strong></p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/why-ipo-pop-performance-airbnb-doordash-valuation-bubble-stock-trading-2020-12'r=reed" >Why the IPO market is exploding in a frenzy that rivals even the 1999 euphoria</a></strong></p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/nyse-direct-listings-plans-sec-investors-protection-legal-concerns-2020-9" >A new twist on direct listings could trigger more big lawsuits against buzzy startups over valuations, lawyers say</a></strong></p><p><a href="https://www.businessinsider.com/williams-trading-secondary-private-market-investment-ipo-traders-2020-12#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/how-symphony-seas-worlds-largest-cruise-ship-deals-with-waste-2020-3">How waste is dealt with on the world's largest cruise ship</a></p>
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