The private equity secondary market has experienced rapid growth in recent years, with annual transaction volumes consistently exceeding $100 billion. This expansion is driven by several factors, including constrained distribution environment, evolving portfolio allocations, and investors’ increasing need for earlier liquidity.
With its growing prominence, education around the asset class is topical, particularly for wealth managers whose clients want greater access to private markets.
In short, the secondary market remains undercapitalised globally and boasts many diversification benefits – understanding how the market works, and how it can fit into a portfolio, is essential.
How secondary transactions work
A secondary transaction is the purchase or sale of an existing interest in a private equity fund to another investor. It is a ‘secondary’ as it typically does not involve new capital commitments to a fund, but rather the transfer of an already existing fund interest.
There are two main types of secondary transactions: LP-led and GP-led. LP-led transactions involve limited partners selling their fund interests to a new investor, typically a secondary firm. Importantly, the structure of the underlying fund remains unchanged, with the buyer stepping into the seller’s position. GP-led transactions, accounting for over 40% of 2024 market volume, have gained traction in recent years. These transactions are initiated by general partners to provide liquidity to existing investors, often through continuation funds, while allowing sponsors to hold onto high-quality assets longer.
Secondary portfolios typically contain a mix of both LP-led and GP-led transactions and can be highly diversified across sponsor, fund, sector, strategy, geography, industry, company, and vintage year.
Liquidity solution – the role of secondaries in portfolios
One of the key benefits of secondaries is their ability to enhance liquidity within private equity portfolios.
Most people associate private equity with long lockups. These lockups can be up to 10-13 years, meaning investors cannot exit their investment during the life of the fund. This illiquidity can create challenges for investors who need to rebalance their portfolios, meet cash flow needs, or optimise asset allocation. Secondaries provide a solution by offering liquidity before the original fund’s lifecycle is complete.
By acquiring interests in mature funds that are further along in their investment cycle, secondary investors generally can expect to receive earlier distributions while potentially acquiring assets at a discount. Unlike primary fund investing, secondaries offer visibility into already invested capital, reducing blind pool risk and giving investors more confidence in pricing and portfolio construction.
Why the growth of the secondary market has been so strong
Macroeconomic and market dynamics have also contributed to the growing appeal of the secondaries market, which has grown at a compound annual growth rate of 13% from 2011 to 2023, reaching an estimated record of over $150 billion in volume in 2024. The resilience of the market’s growth underscores its institutionalisation and long-term viability as an investment strategy.
Secondaries offer greater transparency and reduce blind pool risk while generally providing earlier distributions to investors as compared to traditional primary fund investing.
In an environment where primary distributions have slowed, investors are increasingly turning to the secondary market to generate liquidity and meet capital needs. At the same time, institutional investors and wealth managers are actively rebalancing portfolios, creating greater demand for flexible solutions. The expansion of GP-led transactions has also been a major growth factor, with fund sponsors using the secondary market as a tool to extend the life of high-quality investments while offering LPs a liquidity option.
Chronic undercapitalisation – the investment opportunity
Despite its rapid expansion, the secondary market remains undercapitalised relative to deal flow. The demand for liquidity in private equity investments continues to outpace the capital available from dedicated secondary buyers, creating a favourable pricing environment. Historical data suggests that secondary dry powder has consistently lagged behind transaction volume, reinforcing the case for continued investment in the sector.
The secondary market is expected to grow further as private equity portfolios mature. Recent vintage years in the primary market are likely to drive increased secondary activity, with assets continuing to enter the market over the next five to ten years. The ongoing supply-demand imbalance suggests that buyers will maintain a strong position in the market, with opportunities to invest at favourable valuations.
What secondaries can do for wealth managers
For wealth managers, secondaries offer a compelling opportunity. As private asset strategies become accessible beyond institutional investors, secondaries provide a means to gain exposure to diversified private equity at potentially attractive discounts while mitigating the risks associated with primary fund commitments by purchasing interests when most or all of their capital has been invested. By investing in mature funds, secondaries offer greater transparency and reduce blind pool risk while generally providing earlier distributions to investors as compared to traditional primary fund investing. With private markets becoming an increasingly significant component of wealth portfolios, secondaries will play a vital role in well-rounded portfolios.
*Authored by Clark Peterson, partner, Lexington Partners and contributed to by George Szemere, head of alternatives Emea wealth management, Franklin Templeton.