Secondary market investments

Advantage of secondary markets

Secondary markets offer significant advantages to both GPs when designing evergreen products and private wealth investors keen to gain easy access to existing private market assets. In simplistic terms, secondaries are a distinct marketplace which GPs and LPs use to sell pre-existing assets, often at a discount, to other investors, giving the buyer immediate exposure to companies without having to wait, as is the case when investing in primary funds.

Secondary investments are pre-baked. There is no cash drag.

Last year, private equity secondaries reached approximately $160 billion in deal volume, driven by pension funds, insurance companies seeking liquidity for numerous strategic reasons beyond cash needs. Private credit secondaries is a slightly less mature market but volumes are anticipated to triple over the next few years. Credit funds have shorter, more defined maturities of four to five years compared to private equity funds, which can run for 10 years plus. This is likely to further support growth as investors use credit secondaries as a tactical liquidity tool.

Successful secondary investments require careful asset selection and pricing. Investors should focus on high-quality assets rather than being lured by discounts on lower-quality investments. Consequently, the ability to accurately price assets is crucial, especially in the private credit space where the risk of loss can be significant. Recent market conditions, including rising interest rates, have led to a shift in liquidity dynamics, prompting LPs to seek liquidity for their investments. This has resulted in a higher quality of available assets in the secondary market, presenting new opportunities for investors.