Private Equity Secondaries Surge: Statistics, Risks, and the 2025 Outlook

Private market secondaries are having a bit of a rockstar moment. Transaction volumes hit the $72 billion mark in July and predictions in the financial pages point to a $150 billion record breaking year.

Earlier this year, the Evercore Secondary Market Review indicated how a slowdown in traditional liquidity avenues - perhaps impacted by economic uncertainty and fluctuations or volatility in interest rates - has led to thriving General Partner-led (GP) and Limited Partner-led (LP) secondary transactions.

Investors are seemingly seeking creative ways to cash out of private equity funds or underlying fund assets like real estate.

For GPs, the focus is on high-quality, resilient assets, with large firms bundling assets and mid-sized players concentrating on single investments.

LPs appear to be increasingly selling buyout, credit, and infrastructure portfolios, spurred by attractive pricing and a narrowing bid-ask spread.

This flurry of activity in the secondaries market highlights how innovative deal structures are reshaping liquidity in private equity and solidifying the secondary market as an interesting financial tool.

Now experts believe secondary transactions could swell to $145 billion, according to Houlihan Lokey, or even to $150 billion, according to investment bank PJT Partners, as reported by the Financial Times. But first, what are the secondary sales of private equity, or “secondaries”, all about?

Private Equity Secondaries Explained

Private equity secondaries involve the buying and selling of pre-existing investor commitments in private equity funds.

Unlike primary investments, where private equity investors commit capital to a new fund, secondaries are about the change of ownership of an ongoing fund or underlying portfolio.

It usually occurs mid-way through the investment life of a primary fund and is based on the fund’s current net asset value. A secondary allows the original investor to gain liquidity and cash out earlier, rather than waiting years for value creation to occur as the fund wraps up.

Think of it as buying someone’s football season ticket halfway through a season. Someone who can’t wait until the end and wants some return, sells their ticket to someone eager to jump in.

In recent years, the private equity secondaries market has shown varying signs of growth (see infographic below), driven by changing market conditions and personal data needs, with some secondary buyers even investing in blind pools.

In the case of a blind pool, buyers rely on the fund manager’s expertise rather than knowing all the details of the underlying assets, trusting in their ability to achieve strong returns despite a lack of direct solicitation.

Additionally, it’s worth noting that among funds currently utilizing Vestlane, the use case for KYC/AML has significantly increased. As a result, many funds are now using Vestlane on an ongoing basis for secondary transactions.

Why Secondaries Exist

Secondaries give investors, often LPs, a way to gain liquidity before the fund naturally concludes, which can take many, many years.

This market is valuable because private equity funds are typically illiquid, with investors usually having to wait until all investments are sold off to realize their returns.

Key Players

• Limited Partners (LPs): These are the original investors looking to sell their stakes in private equity funds. LPs seek secondary investors when they need liquidity, want to adjust their portfolio, or take advantage of high secondary market pricing.
  
• General Partners (GPs): The fund managers, or GPs, may initiate GP-led secondary transactions, often restructuring funds or moving assets into new vehicles to extend the life of valuable investments and secure new terms.
  
• Secondary Buyers: These are specialized investors or funds that purchase stakes from LPs or enter GP-led transactions, often at a discount, giving them access to an established portfolio and quicker returns than a typical primary commitment.

Types of Secondary Transactions

• LP-Led Transactions: Here, individual LPs sell their stakes in a private equity fund. This may involve a single stake or a portfolio of multiple fund positions.
  
• GP-Led Transactions: In GP-led secondaries, the fund manager orchestrates a liquidity event by moving assets into a new fund (called a continuation vehicle). This helps GPs extend the life of top-performing assets or provide liquidity options to investors.

Record Breaking Year for Private Equity Secondaries?

So what are the most eye-opening insights from the year so far? Well, a tranche of mid-year advisory reports all pointed to a resurgence for secondaries, with Campbell Lutyens reporting that the H1 deal flow was the “largest on record”.

Transaction levels reportedly grew by 72% year-on-year to $69 billion with the advisory firm predicting the full year could potentially reach $137 billion in secondary fund deals.

Evercore capital advisory reported volume to be slightly higher at $72 billion in July, with the LP-led market accounting for 57% of the total volume, while the GP-led market made up the remaining 43%.

The Evercore report added that the LP-led market experienced high activity, driven by liquidity pressures and favorable pricing, encouraging both existing and new LPs to sell more frequently.

Interestingly, GP-led transactions practically doubled year-over-year, reaching H1 2021 levels as sponsors sought liquidity through continuation vehicles.

The secondary market saw notable innovation and diversification, with more vehicles dedicated to GP-led transactions, evergreen funds, and increased participation from specialized buyers across asset classes such as infrastructure and credit.

In their outlook for the second half of 2024, Jefferies, one of the world’s leading investment management firms, projected a record-breaking annual transaction volume exceeding $140 billion in the secondary market.

They put this down to a combination of increased transaction supply and potential interest rate cuts.

Jefferies also reported that continuation funds represented a staggering 90% of GP-led transaction volume in H1 2024, with single-asset continuation funds leading at 64% in this category.

They anticipate LP portfolio pricing to continue rising, potentially exceeding 90% of net asset value in the latter half of 2024. For H2 2024, Jefferies expects sustained LP-led transaction volumes near $40 billion and GP-led volumes to surpass $35 billion.

Continuation Funds Percentages Spark Caution

Continuation funds made up a large proportion of the $72 billion in secondary deal volume in the first half of 2024. That’s led some experts to express caution.

While continuation funds provide a way to hold valuable assets beyond traditional timeframes, LPs are concerned about transparency, conflicts of interest, and potentially unfavorable pricing. If you’ve not seen it, this article is worth a read. Private Equity International (PEI) spoke to investors from New York City Retirement Systems, TRS Texas, Alaska Permanent, Caisse des Dépôts, and Skandia. It gives some insight into concerns within the investment sphere.

The article from PEI suggests that while continuation funds offer liquidity, they come with complexities that make many LPs wary.

The Secondary Market in 2025

A booming secondary market can be a good thing for primary funds as it enhances their appeal by giving limited partners more confidence in committing capital, knowing they have liquidity options if needed.

It may also reduce pressure on fund managers, as LPs seeking liquidity can sell on the secondary market rather than push for early exits.

On the back of these 2024 numbers, and if you’ve seen the recent Coller Capital research and insights post, there are plenty of reasons to feel optimistic heading into 2025.

Beyond just liquidity needs, more investors are seeing the secondary market as a smart tool for actively managing their portfolios. The growth means that both newcomers and experienced players are increasingly drawn to the flexibility that secondary deals offer.

Next year could be a big year, with the secondary market becoming an even more integral part of private equity investing. If you’re looking to capitalize on the secondaries trend, platforms like Vestlane help with the onboarding of secondary investors and streamlining ongoing Know Your Customer and anti-money laundering processes.

With the secondary market increasingly integral to private equity investing, 2025 is poised to be another landmark year, likely marked by further growth and innovation. I can’t wait to see what the future holds to be honest.