Are secondaries the new primaries? Not so fast

The proportion of secondaries transaction volumes to primary capital raised has stayed stubbornly around the 1% mark, as the primary market continues to grow.

Record 2020 fundraising of $98.1 billion; 2021 deal volumes on course to top $100 billion for the first time; the introduction of massive new entrants such as Apollo, Ares and Macquarie. It is no wonder that confidence in the secondaries market is high.

One senior London-based executive went so far as to say in April: “In 2050 we [the secondaries market] are going to be called private equity, and buyouts will be called primary – that’s how explosive it’s going to be.”

Yann Robard, managing partner at Whitehorse Liquidity Partners, says there is a logical path to $1 trillion of annual secondary volume and beyond. The amount of capital invested in private markets hit $8.5 trillion in 2020. Assuming an annual growth rate of 10 percent, that figure will hit $22 trillion by 2030. Currently, only about 1 percent of private capital is traded each year. Just a small increase would have a tremendous impact on volumes.

The opening of the secondaries market to new investors is also driving growth. According to Emmanuelle Dotezac, director of funds and private wealth at fund services firm IQ-EQ, there has been a marked increase in family offices and individuals tapping the strategy through feeder funds set up by private banks. This is helping them flatten the J-curve but also to build a rapport with top-performing managers that they cannot access on a primary basis.

It’s “definitely possible” that secondaries could outgrow the primary market, Dotezac says, adding that dramatic change is more common than many people think: “The public markets were virtually closed in the ’80s.”

Undue optimism

“All of these private equity funds have different transfer needs and some buyers and sellers also have very specific requirements. [Technology] lends itself more to sales of private companies. I think that companies will lead this market before LP interests.”
Mike Bego, Kline Hill Partners

The optimism, while understandable, should be tempered. The share of secondaries transaction volumes to primary capital raised has stayed stubbornly around the 1 percent mark, as the primary market continues to grow. Though several secondaries buyers noted a long-term decline in investors’ appetite for blind-pool risk, which they think will play into their hands, it has yet to make a material impression on the numbers.

Even if the technology were there, it is not clear that general partners would jump to use it. Many GPs, particularly top-performing ones, will not accept certain LPs into their funds. Others still try to guide stakes for sale in their funds towards a preferred buyer. “If there is a trend, it is GPs becoming more selective about who they will allow into their funds,” says the head of a New York-based mid-market secondaries firm.Though easier than it was, buying and selling funds is far from frictionless. Groups such as Moonfare and Palico have built platforms that allow the trading of LP stakes, but no one has yet found a way to unlock easy liquidity for all investors. “All of these private equity funds have different transfer needs and some buyers and sellers also have very specific requirements,” says Mike Bego, managing partner with Kline Hill Partners. “[Technology] lends itself more to sales of private companies. I think that companies will lead this market before LP interests.”

The secondaries market will continue to grow. A Robinhood-style revolution won’t arrive tomorrow, but could be the future.