The total assets under the management of private equity grew from $2.4 trillion in 2010 to $6.5 trillion in 2020. While this growth has been going on for a while, the private equity secondary market has been a more recent phenomenon. This growth is being driven by the increasing number of investors looking for higher returns in a low-risk environment.
The private equity secondary market has experienced a six-fold increase in its value over the past decade. It is a vital option for sellers who are looking to exit their underperforming private equity funds. During the 1990s, it was primarily used by limited partners who were looking to exit their funds.
Due to the increasing number of investors and the need for liquidity, the secondary market has become a vital option for limited partners who are looking to reduce their exposure to future capital calls. One of the main reasons why limited partners are now using the secondary market is to re-balance their portfolios. For instance, if a limited partner has 15 percent of their portfolio allocated to private equity, then this can grow to around 20 percent of their overall portfolio.
Some limited partners are also reducing their exposure to underperforming tail-end funds. These funds still require a significant amount of administrative resources to operate. The increasing number of investors who are looking to increase allocations to environmental, social, and corporate governance (ESG) funds are also boosting the secondary market.
The secondary market provides an attractive alternative for investors who are looking to gain access to the high returns of private equity. It also allows them to maintain their hold periods and get quicker distributions. Unlike in the initial fundraising phase, the investments made by a private equity fund are known by the time the secondary sale takes place.
Besides generating returns, the secondary market also allows limited partners to build stronger relationships with their general partners. The increasing number of private equity fundraisings has made this asset class an increasingly popular choice for investors.
Due to the increasing number of general partners providing liquidity to their limited partners, the secondary sale process is becoming more streamlined. The private equity secondary market is expected to continue to grow as investors have an opportunity to access the liquidity of an otherwise liquid market.