Can secondaries defrost private equity’s frozen pipes?

LPs are selling positions for new reasons today. “Straight LP-led sales provide a simple form of liquidity,” says Anastasiadis. “What’s most interesting to me is that, having been in the market for 13 years now, I’ve never seen LPs be so sophisticated in the way they are using the secondaries market. For example, LPs are not just looking to trim relationships as has been the case in the past. We’re seeing some LPs sell, say, 30% to 40% of a single position to maintain relationships – they are freeing up capital to re-up with managers while also maintaining vintage year diversification and exposure.”

It's a trend that Louis Choy, Managing Director at Carlyle AlpInvest, also notes. “There are a lot of anchor LP positions in the market today,” he says. “Many of these sales are motivated by the need to keep investing. These LPs are often not just trading out of relationships; they are trading out of previous funds where they are keeping GP relationships.”

The secondaries market needs to grow into the opportunity set. “The secondaries market needs to be a lot bigger than it is today,” says Cari Lodge, Managing Director and Head of Secondaries at CF Private Equity. “Secondaries are now providing around 25% of liquidity to the market, including continuation vehicles. If we were to take the opportunity set, the market should reach $250bn in 2025 – it was $140bn in 2024 – because people need that much liquidity.”

LPs see GP-leds as a useful liquidity tool… “Pre-2021, the rule of thumb was that between 15% to 20% of LP capital would roll in a GP-led deal,” says a managing director at a secondaries firm. “That has reduced to below 10% today. A lot of LPs need liquidity, they are looking at GP-led situations and making the call that they offer decent returns on their assets and the chance to take money off the table.”

Last year saw a near-20% increase in exit value from global private equity portfolios from 2023 levels – totals were $902bn, up from $754bn, according to PitchBook preliminary figures. This may have done something to ease the pressure on liquidity in the market, but both LPs and GPs have started 2025 with considerable indigestion, given the annual $2trn or so private equity investment pace in the peak 2021 and 2022 years. “We are going through a distribution winter,” says Antony Anastasiadis, Managing Director, Secondary Investments at Hamilton Lane. “The amount coming back in 2022 and 2023 was similar to what we saw in 2017 and 2018, but there are far more dollars in the ground now – the percentage of distributions is much lower because NAV has ballooned.”

Even if M&A markets continue the upward trajectory we saw in the second half of 2024 and exits via conventional routes pick up further, clearing the backlog in private equity portfolios is going to take both time and considerable amounts of capital. So will secondaries pick up the slack? And how has the clamour for continuation vehicles affected portfolios and LP sentiment? Here’s a round-up of secondaries trends.

I’ve never seen LPs be so sophisticated in the way they are using the secondaries market.

George Anastasiadis, Campbell Lutyens

LPs want liquidity, but they also want effective fund management. “We are trying to instil in our GPs that there is a need to deal with the B assets in the fund,” says Michael Lindauer, CIO at Allianz Capital Partners. “How can they make sure there is liquidity from these as well as the A assets rather than leaving them to linger in the fund?”

But evidence of continuation vehicle fatigue is creeping in… Many LPs suggest that continuation vehicles (CVs) rank lower in their estimation than a more traditional exit, such as a trade sale, when it comes to analysing a fund’s DPI. But what about firms that have repeatedly tapped the secondary market for realisations? “We’re beginning to see some friction where some GPs have completed a number of single-asset CVs,” says Patrick Knechtli, Head of Secondaries at Patria Investments. “Some LPs are saying that they’d prefer to see proper exits come through and there are instances where LPs have decided to step away from some of the mega-managers because they perceive they have pursued too many exits via GP-led deals.”

The issue of GPs structuring CVs of CVs is also a live concern, with some LPs reporting that this is starting to happen. “LPs may start to ask how many times they can support continuation vehicles,” says Philippe Ferneini, Partner at StepStone Group. “But we will see more CV of CV structures where buyers step in to provide the initial CV with some liquidity.”

“This is probably more of an issue in the largest deals where the exit options are more limited,” adds a managing director at a secondaries advisory firm. “The question is whether it makes sense for a GP to continue holding an asset – there’s less of a case in the mid-market because the next step could be for a company to expand in the US, for example.”

Secondaries are now providing around 25% of liquidity to the market…the market should reach $250bn in 2025.

Cari Lodge, CF Private Equity

Tender offers are growing in popularity. “We’re seeing GPs do tender offers where they can see LPs want liquidity but they don’t want to do a CV,” says Lodge. “They can send out one price to all LPs, especially in older funds, allowing everyone who wants liquidity to get it. Some are even offering a regular programme of tender offers.”

The jury is still out on GP-led returns. Given the relative nascence of the type of single-asset deal we see today, the market still lacks a clear picture of whether these kinds of deal deliver the returns many are expecting. “The Covid period really accelerated the single-asset GP-led market’s development,” says Knechtli. “And while I think people understand the arguments about investing in high quality deals with an incumbent GP who knows the assets really well, this part of the market still has quite a long way to play out and for the theory to become more proven. We’re seeing exits from our GP-led portfolio coming through at above 2.5x money – which is extraordinary for a secondary fund – but most GP-led portfolios today remain largely unrealised and we need more actual exits to come through before we can properly judge performance, loss ratios and ultimately the success of GP-leds as a strategy.”

Ferneini agrees. “We’ve been surprised on the upside in our GP-leds – they are tracking above plan,” he says. “We see strong interim marks and the thesis of backing the best quality assets and GPs, where they have skin in the game, is holding strong. But we do need to see exits and DPI. So 2025 and 2026 will be key here.”