OPPORTUNITIES IN THE PRIVATE EQUITY SECONDARIES MARKET
The private equity secondaries market offers investors one of the most exciting opportunities in private markets today. Secondaries are a strategy where market dislocations, and, in particular, periods of heightened volatility, create significant openings to purchase high-quality assets at material discounts to their intrinsic values. The secondary market has grown from a relatively small asset class in the early 2000s to an industry with over $100 billion of transaction volume in 20221. However, while the secondary industry has experienced rapid growth over the past twenty years, it remains a niche component of the overall alternatives space, representing only a small fraction of total private equity assets under management. We expect that as more investors gain awareness of the attractive investment opportunities available and observe the compelling risk-adjusted returns generated from secondary transactions, this percentage will increase.
Investors who have not allocated to secondaries in the past are now gaining awareness of the differentiated return potential from this “good in good times, great in bad times” asset class, and are doing their due diligence on the space and on secondaries managers. Sellers, including both limited partners (“LPs”) and general partners (“GPs”), are looking to the secondary market as a way to manage portfolios and funds through a period of shifting market liquidity. LPs are looking to secondary markets to sell private equity holdings and rebalance their asset allocations after a difficult year for public markets generally and specifically for the “60/40” stock/bond portfolio. GPs are utilizing the secondary market to provide liquidity for legacy fund investors, while maintaining control of prized-businesses with significant value creation opportunities that require additional time and capital. The past year offered a rich opportunity set for secondary buyers, and the year ahead is setting up to be one of the best market environments for multi-strategy secondary fund managers. In this paper, we explore four key trends in the secondary market and dive into how these key trends support the potential for outsized returns.