With the UK government looking to cut red tape and expand the private equity industry while seeking broader participation for smaller investors via Long-Term Asset Funds, private markets will increasingly be on the radar of investment advisers.
Advisers may equate private equity primarily with buy-out funds. But secondary private market transactions – where investors sell stakes in companies they initially bought intending to hold for around a decade – represent a dynamic and fast-growing segment of the market. They deserve attention for both market-based and structural reasons.
The outcome of Trump’s ‘Liberation Day’ tariffs (and their subsequent pause) remains uncertain. But a sustained market shock following this event may create significant opportunities for secondary funds.
Secondary managers may have greater choice of assets at higher discounts if institutional sellers rebalance their portfolios in what is known as the ‘denominator effect’, and if private equity managers continue to find traditional exits challenging.
Secondaries have come into their own since the Covid pandemic: the secondary market saw extraordinary growth in 2024, with annual transaction volumes up 45% to $162bn.
As traditional exit channels like IPOs and M&A grew sluggish in late 2022, private equity managers (GPs) and end investors (LPs) began to adopt secondaries as a strategic liquidity solution, while pull dynamics from investors have also played a part.
Secondaries potentially offer several in-built advantages for suitable clients. They can fill a demand gap for shorter time horizons, and for enhanced liquidity and diversification.
Secondary transactions are the private markets segment best suited to providing liquidity
Unlike traditional private equity structures, which exhibit a J-shaped return pattern of initial losses followed by potentially steeply rising gains (the ‘J-curve’), secondary purchases are typically of mature companies already generating cashflows, thus potentially shortening the path to distributions.
This goes some way to addressing client concerns about long capital lockups with delayed returns. That said, secondaries typically work best for clients with investment horizons longer than five years – but who want private markets exposure of potentially shorter duration than traditional closed-ended structures.
Secondary investments can also provide instant diversification across managers, strategies, sectors, and vintage years.
For clients new to alternatives, this reduced concentration risk can provide significant comfort. Also, with investments being in established portfolios, clients gain clearer insight into underlying assets compared to the ‘blind pool’ risk of primary commitments.
Finally, but importantly, secondary transactions are the private markets segment best suited to providing liquidity.
There are an increasing number of ‘semi-liquid’, largely secondary-based funds on the market with minimums approaching retail level. These structures offer periodic liquidity windows with liquidity reserves of varying sizes supported by cash and cash-like instruments and other tools.
The outlook for the secondaries market is positive
The ‘semi’ part of this investment type is important. Funds will usually have a gating mechanism designed to limit liquidation in the interests of the remaining investors in the fund, should it be required.
Another reason to consider secondaries is the potential for out-performance versus other parts of the alternatives market. I already mentioned the likely steepening of discounts if the Trump tariff effect is long lasting.
But buying assets at a discount is built into the secondary manager’s strategy. These typically range from 5-25% depending on market conditions and asset quality and have the potential to move closer to NAV as the assets mature.
The outlook for the secondaries market is positive. They are likely to remain a permanent fixture even when traditional exit channels fully reopen. The ‘distribution drought’ experienced in recent years has established secondaries as an essential portfolio management tool rather than merely a liquidity solution of last resort.
For advisers’ clients, the secondary market can offer an ideal entry point to private markets, with clearer visibility and potentially earlier distributions than primary investments. However, manager selection remains crucial, as the dispersion of returns in secondaries can be significant.
We believe the private equity secondary market remains undercapitalised but poised for continued growth, driven by strong demand for high-quality assets and a broadening investment community. For independent advisers and suitable clients, secondaries represent a practical solution to private equity’s liquidity challenges and a strategic opportunity to enhance portfolio construction.
Steffen Pauls is Founder and co-chief executive of Moonfare