The private equity secondaries market has been growing at a remarkable pace, becoming one of the most dynamic and sophisticated segments of private equity.
What’s behind this rapid growth?
It’s a combination of evolving investor needs, shifting market dynamics, and the increasing institutionalization of the private equity space.
Over the past decade, this market has expanded significantly - and it’s not slowing down anytime soon.
Factors like the need for portfolio diversification, a rising demand for liquidity solutions, and the push for greater market efficiency are all fueling its continued growth.
In this article, we’ll cover the fundamentals of the private equity secondaries market, including its key growth drivers, transaction types, and major participants; by the end, you’ll have a better understanding of how this dynamic market operates and why it’s becoming an essential part of private equity investment strategies.
What is the Secondary Market?
The private equity secondary market enables investors to buy and sell existing interests in private equity funds or companies. This mechanism provides liquidity to sellers and allows buyers to gain exposure to established portfolios, often at discounted prices. In 2024, the market experienced significant growth, with transaction volumes exceeding $152 billion, surpassing previous records set in 2021 (Lazard). Lazard expects this volume to reach roughly $175 billion in 2025.
Key Growth Drivers
1. Liquidity Needs and Portfolio Optimization: One of the primary reasons behind the growth of the secondaries is the increasing demand for liquidity among limited partners (LPs). Private equity funds typically have long investment horizons, often spanning 10 to 15 years, which can lock up capital for extended periods. The current macro-environment and slower exit activity in the private markets has significantly impacted the DPI of private equity funds.
Bain reported in a March 2024 report that these PE funds are holding on to approximately 28,000 unsold companies worth a record $3.2 trillion. As a result, investors such as pension funds, endowments, and family offices may need to adjust their portfolios before these funds reach their maturity or final exit points. The secondaries market provides an avenue for LPs to sell their stakes and achieve liquidity without waiting for a fund's exit event.
2. Diversification of Portfolio Exposure: Another driver is the increasing need for institutional investors to diversify their private equity portfolios. By purchasing stakes in existing funds or portfolios, investors in secondaries funds gain exposure to a broader range of investments than they might achieve through primary fund commitments alone.
These investments allow buyers to achieve a more balanced and diversified portfolio across different asset classes, sectors, geographic regions, and vintage years.
3. Attractive Pricing and Discounts The secondaries market often provides opportunities for investors to acquire private equity fund interests at a discount to their net asset value (NAV). Due to factors such as time sensitivity and the need for sellers to meet liquidity needs, stakes in funds can often be purchased at lower prices compared to the NAV, offering buyers an attractive entry point. LP sellers typically sell their interests at a discount ranging roughly 10% to 30%(VRC).
Who is Involved?
The secondary market comprises several key participants:
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Sellers: Institutional investors such as pension funds, endowments, and insurance companies often seek liquidity or portfolio rebalancing by selling their private equity stakes.
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Buyers: Private equity firms, hedge funds, and high-net-worth individuals acquire these interests, aiming to benefit from the underlying assets' performance.
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Intermediaries: Investment banks and advisory firms, including Jefferies, Evercore, and Lazard, facilitate these transactions by connecting buyers and sellers, providing valuation services, and ensuring compliance with regulatory requirements. Their expertise is crucial in navigating the complexities of secondary deals.
Different Types of Transactions
Secondary transactions are primarily categorized into:
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LP-Led Transactions: Limited Partners sell their stakes in private equity funds to other investors, often at a discount to the Net Asset Value (NAV). This approach allows LPs to achieve liquidity and reallocate capital. In 2024, LP-led transactions accounted for 52% of the total secondary market volume, totaling $80 billion (Lazard).
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GP-Led Transactions: General Partners initiate deals to restructure or extend the life of a fund, providing liquidity options for existing investors and additional capital for portfolio companies. 48% of total secondary market volume came from three types of transactions totaling approximately $72 billion (Lazard). These transactions include:
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Continuation Vehicles (CVs): Transferring assets into a new fund to extend the holding period.
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Tender Offers: Allowing existing investors to sell their stakes or reinvest under new terms.
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Preferred Equity Solutions: Offering partial liquidity while retaining exposure to future gains.
How LP-Led Transactions Work
The process for LP-led secondary deals typically involves:
1. Decision to Sell: LPs opt to sell their fund interests to achieve liquidity or rebalance their portfolios.
2. Engagement of Advisors: Investment banks or advisory firms are retained to manage the sale process and identify potential buyers.
3. Valuation and Due Diligence: Prospective buyers conduct thorough analyses of the fund's holdings to determine a fair purchase price, often negotiating discounts to NAV.
4. Transaction Execution: Upon agreement, the sale is executed, transferring the LP's interest to the buyer, who assumes the associated rights and obligations.
5. Post-Transaction Integration: The new investor integrates into the fund's structure, participating in future distributions and decisions.
How GP-Led Transactions Work
GP-led secondary deals generally follow these steps:
1. Initiation: GPs, with the assistance of legal and financial advisors, propose a restructuring or extension of the fund's life.
2. Investor Approval: GPs seek consent from the Limited Partner Advisory Committee (LPAC) and other stakeholders to proceed with the proposed changes.
3. Asset Transfer: Assets are moved to a new Special Purpose Vehicle (SPV), creating a fresh investment vehicle for continued management.
4. Investor Options: Existing investors decide whether to reinvest in the new structure, sell their stakes, or exit entirely.
5. Capital Deployment: The new fund deploys additional capital to support portfolio companies, with the aim of enhancing returns.
Recent News
Ardian raised $30 Billion for their ninth secondaries fund, the largest secondaries fundraise in history (dakota)
Ex-Blackstone GP Stakes Global Head Forms PE Secondaries Firm (dakota)
Franklin Templeton, Lex Partners Launch Evergreen US Wealth PE Secondaries Fund (dakota)
Outlook
The outlook for the secondaries market remains strong, with sustained growth projected as investor demand for liquidity, diversification, and competitive pricing continues. With private equity firms and institutional investors looking for ways to optimize their portfolios in an evolving market, secondaries will likely play an increasingly central role in private equity investment strategies.
As private equity funds continue to grow in size and complexity, the secondaries market will evolve to provide more innovative solutions. The trend toward more customized, flexible secondary transaction structures is likely to continue, as investors look for tailored solutions that meet their unique liquidity and investment objectives.
