Private equity – understanding the secondary market
The secondary market has become a useful tool for liquidity within the private market arena. General partners (GPs) and limited partners (LPs) alike can manage assets or release cashflow through a secondary transaction, if situations or investment strategies change.
Just as the popularity, size and sophistication of private markets have grown over time, so too has the number of opportunities and offerings in the secondary market. So what’s the appeal of the secondary market and what should investors know about this area of growing interest?
In brief, many investors are drawn to secondary funds for these distinct characteristics that set them apart from the primary market.
- Early liquidity – distributions come quicker as portfolio companies are later in the hold period.
- J-curve smoothing – secondaries transactions can benefit from quicker uplifts in valuations, mitigating the initial negative returns associated with primary commitments.
- Portfolio visibility – less blind-pool risk than a primary fund commitment.
- Broad diversification – secondaries typically invest in more managers and portfolio companies, and across vintages, sectors and geographies.
As with any investment strategy though, there are key points of diligence and difference that investors should consider. There are various considerations for LP-led and GP-led secondary transactions, some unique to each category, others that apply to both. One example of the latter is that of alignment, a topic we explore in more detail in our paper.
With a diligent and thoughtful approach, we believe an allocation to secondaries can enhance investors’ private market portfolios.
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