Private-equity secondary market

In finance, the Private Equity Secondary Market (also often called Private Equity Secondaries or Secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds or the underlying private equity assets. Unlike public markets, private-equity interests lack an established trading exchange, making transfers more complex and labor-intensive.

Sellers of private-equity investments sell not only their holdings in a fund but also their remaining unfunded commitments. The private-equity asset class is inherently illiquid and is designed for long-term investment by institutional investors, such as pension funds, endowments, and wealthy individuals. The secondary market provides these investors with an avenue for liquidity, enabling them to manage their portfolios dynamically. The secondary market reached a transaction volume of $108 billion in 2022.

Buyers seek secondary private-equity interests for multiple reasons, including shorter investment durations, potential discounts on valuations, and greater visibility into the assets held by the fund. Conversely, sellers engage in secondary transactions to raise capital, reduce over-allocation to private equity, or meet regulatory requirements.

As private equity has matured, two main segments of the secondary market have emerged:

• LP Interest Secondaries – In these transactions, buyers acquire limited partnership (LP) interests in private-equity funds. The buyer assumes all rights and obligations of the seller, including future capital calls and distributions.
• GP-Led Secondaries – In these transactions, a private-equity fund's general partner (GP) leads a process to provide liquidity to existing investors by selling assets from an existing fund into a new vehicle. GP-led secondaries have grown significantly, comprising over one-third of the secondaries market as of 2017, with expectations of reaching 50% in the near future.

The private-equity secondary market has evolved into a dynamic and essential component of private equity, offering liquidity solutions to investors. As GP-led transactions grow and institutional participation expands, the secondary market is expected to continue increasing in volume and complexity.

Types of Secondary Transactions

Secondary transactions can be generally divided into two primary categories:

LP Interest Secondaries (Sale of Fund Interests)

This is the most common type of secondary transaction, involving the sale of an investor’s interest in a private-equity fund or a portfolio of multiple fund interests. Transactions may take several forms:

• Traditional Sale – A simple transfer of LP interests where the buyer assumes all obligations and rights.
• Structured Joint Ventures – A customized transaction where buyers and sellers agree on shared ownership structures.
• Securitization – The seller contributes fund interests into a vehicle that issues notes, generating partial liquidity.
• Stapled Transactions – A secondary buyer acquires interests in an existing fund while also committing capital to a new fund being raised by the GP.
• Low-Funded Secondaries – Involves selling interests in young funds that have called less than 10% of committed capital.

GP-Led Secondaries

Also known as secondary directs or synthetic secondaries, these transactions involve the sale of a portfolio of direct investments in operating companies. Subcategories include:

• Secondary Directs – A buyer purchases a portfolio of direct private-equity investments from a corporation or institution.
• Synthetic Secondaries – Investors acquire interests in a newly formed limited partnership holding direct investments.
• Tail-End Secondaries – Sales of remaining assets in a private-equity fund nearing the end of its term.
• Structured Secondaries – The buyer funds future capital calls in exchange for a preferred return on future distributions.

Secondary-market participants

The private-equity secondary market was originally created by Dayton Carr, the founder of Venture Capital Fund of America (VCFA Group), in 1982. Carr had been managing a venture capital investment firm in partnership with Thomas J. Watson Jr. who was then Chairman of IBM Corporation. As their venture fund matured Carr purchased Watson out of his partnership interest in 1979, just before Watson became U.S. Ambassador to the Soviet Union (Appointed by Jimmy Carter). This is believed to be one of the earliest private-equity secondary transactions. Carr, shortly thereafter, made a strong return on this investment and subsequently shifted his investment focus to purchasing other limited partnership interests in venture capital funds. Through a series of small funds, raised and managed by Dayton Carr, under the VCFA name, the secondary industry was born. VCFA is still in business today and still focuses primarily on secondary private equity investments in venture and growth equity funds. Since its inception through VCFA Group the secondary industry now features dozens of dedicated firms and institutional investors that engage in the purchase and sale of private-equity interests. Recent estimates by advisory firm Evercore gauged the overall secondary market's size for 2013 to be around $26 billion, with approximately $45 billion of "dry powder" (not yet invested capital) available at the end of 2013 and a further $30 billion expected to be raised in 2014. Such large volumes have been fueled by an increasing number of players over the years, which ultimately led to what today has become a highly competitive and fragmented market. Leading secondary investment firms with current dedicated secondary capital in excess of circa $3 billion include: Blackstone Strategic Partners, AlpInvest Partners, Ardian (formerly AXA Private Equity), Capital Dynamics, Coller Capital, HarbourVest Partners, Lexington Partners, Pantheon Ventures, Partners Group and Neuberger Berman.

Additionally, major investment banking firms including Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley have active secondary investment programs. Other institutional investors typically have appetites for secondary interests. More and more primary investors, whether private-equity funds of funds or other institutional investors, also allocate some of their primary program to secondaries.

As the private-equity secondary market matures, non-traditional secondary strategies are emerging. One such strategy is preferred capital, where both limited partners and general partners can raise additional capital at net asset value whilst preserving ownership of their portfolio and its future upside.

Additionally, an increasing number of pension funds, sovereign wealth funds, and family offices have become active participants in the secondary market.

History of the Private Equity Secondary Market

Main article: History of private equity and venture capital

=== Early Development and Founding Pioneers === The origins of the private equity secondary market can be traced back to 1982, when Dayton Carr founded the Venture Capital Fund of America (VCFA Group). This was one of the first firms dedicated to acquiring interests in venture capital, leveraged buyout, and mezzanine funds.Contrarian : Second Helping Archived 2008-03-09 at the Wayback Machine (Dealmaker, 2007) Other early figures in the market included Jeremy Coller, founder of Coller Capital, and Stanley Alfeld, who established Landmark Partners."Europe's 50 Most Influential in Private Equity 2019 - Slideshow - Private Equity News". www.penews.com. Retrieved 2020-10-12. During the 1990s, the secondary market gained traction as institutional investors sought liquidity for their private equity holdings. The launch of Coller Capital’s globally focused secondaries fund in 1998 marked a significant milestone. By 1997, transaction volumes had exceeded $1 billion for the first time. === Growth Through the Dot-Com Bubble and Financial Crisis of 2007–2008 === In the aftermath of the dot-com crash in the early 2000s, demand for liquidity increased as investors looked for ways to exit their venture capital commitments.Cortese, Amy. "Business; Private Traders See Gold in Venture Capital Ruins." New York Times, April 15, 2001. Notable transactions included Coller Capital’s 2001 acquisition of 27 companies from Lucent Technologies, which helped formalize the concept of secondary direct investments.Press Release: Lucent Technologies and Coller Capital form independent venture firm to manage Lucent's New Ventures Group portfolio Archived 2009-02-01 at the Wayback Machine Between 2004 and 2007, the secondary market surged in both volume and sophistication, driven by increased participation from financial institutions. Large-scale transactions during this period included UBS AG’s $1.3 billion sale of fund interests to HarbourVest Partners in 2003 and Deutsche Bank’s $2 billion portfolio sale in the same year.MidOcean Embraces Independence. Financial Times, March 9, 2003 The 2008 financial crisis saw another wave of heightened activity. Financial institutions including Citigroup, ABN AMRO, and AIG sought to offload their private equity holdings to free up liquidity.Cash panic sweeping VC industry: The capital calls problem VentureBeat, November 7, 2008 Secondary transactions were often executed at steep discounts, reflecting the market uncertainty at the time. === Post-Crisis Expansion and GP-Led Secondary Transactions === Following the financial crisis, the secondary market rebounded rapidly. Between 2010 and 2013, record-breaking transactions reshaped the landscape. Notable deals included: • Lloyds Banking Group’s 2012 $1.9 billion sale to Coller CapitalEuropean Secondaries Deal of the Year, 2012 Archived 2013-09-21 at the Wayback Machine • New York City Employees Retirement System’s $975 million portfolio sale • State of Wisconsin Investment Board’s $1 billion portfolio saleRunning From Megafunds, Wisconsin Sells $1B Portfolio By 2014, transaction volumes had reached $49.3 billion, and a new trend emerged: GP-led secondaries. These transactions, where a private-equity firm restructures an existing fund to provide liquidity to investors, gained traction and became a mainstream strategy by 2018, accounting for more than one-third of the secondary market."GP-Led Secondary Transactions: A "New-Fashioned" Way of Achieving Liquidity" (PDF). === Continued Market Evolution (2019–Present) === The secondary market continued to expand in 2019 and 2020, with major players such as Blackstone Strategic Partners and Lexington Partners raising record-sized funds. During the COVID-19 pandemic, the market initially slowed but rebounded as institutional investors sought liquidity solutions. As of 2022, transaction volumes surpassed $100 billion, marking an all-time high for the industry. GP-led transactions now constitute nearly 50% of the market, and innovations such as preferred equity and continuation funds have further diversified secondary investment strategies.Burroughes, Tom. "In Tough Times, Private Market Secondaries Can Shine." Wealth Briefing, March 21, 2023 The private-equity secondary market, once a niche segment, has evolved into a vital component of private equity, providing liquidity solutions and active portfolio management tools for investors worldwide.

See also

• Private equity
• List of private-equity firms
• Venture capital
• History of private equity and venture capital

References

• Lemke, Thomas P., Lins, Gerald T., Hoenig, Kathryn L. & Rube, Patricia S., Hedge Funds and Other Private Equity Funds: Regulation and Compliance (Thomson West, 2014 ed.).
• Cannon, Vincent T. Secondary Markets in Private Equity and the Future of U.S. Capital Markets, Harvard Law School.
• All about private equity investing in Secondaries (AltAssets), Sector Analysis: Case for Sectors. (Articles from 2001 to 2007)
• Private Equity Secondaries Ennis Knupp
• The evolution of private equity secondary activity in the United States: liquidity for an illiquid asset (Routes to Liquidity, 2004)
• Overlooking Private Equity Partnerships Can Be Costly Mistake Secondary Market Offers Liquidity for Limited Partners (Turnaround Management Association, 2006)