Secondaries Special: Crowding the market

New entrants to the private equity secondary market are attracting talent and capital that was previously the sole preserve of dedicated secondaries investors. Graham Winfrey reports

In recent years, a diverse group of private equity investors has entered the global secondaries market to compete for deals with secondary funds. 

These non-traditional buyers range from advisory firms to public pensions to large sovereign wealth funds – many of whom have added investment staff with secondaries expertise to strengthen their position in this growing segment of private equity. 

“There are a lot of institutional limited partners that are getting into the game on an opportunistic basis,” says Scott Conners, partner at secondaries firm Landmark Partners. “The consultants are starting to do some of this on their own too.”

In what will probably be the largest secondary transaction of 2012 completed by a non-traditional buyer, China’s State Administration of Foreign Exchange (SAFE) in July agreed to buy a portfolio of private equity stakes owned by General Motors’ pension plan for somewhere between $1.5 billion and $2.5 billion. The positions include funds managed by The Blackstone Group, The Carlyle Group and CVC Capital Partners. 

It’s a large secondary transaction by any measure; but the deal represents just a sliver of the more than $3 trillion in foreign exchange reserves SAFE manages for China. And therein lies one of the big advantages for sovereign wealth funds when it comes to buying secondary stakes: their cost of capital is usually lower than that of traditional secondary funds.

SAFE did not act alone, however; it brought in Lexington Partners as an advisor. One of the largest and most significant players in this area of the private equity market, Lexington is currently investing its $7 billion seventh global secondaries fund and $650 million second mid-market fund. (The firm opened a Hong Kong office last year, to foster relationships like the one with SAFE).

New entrants have undoubtedly added to the competition for deals. But with transaction volume in the global secondaries market growing steadily since 2009, following the financial crisis, there continues to be a healthy supply of investment opportunities to meet the increasing demand from both traditional and non-traditional secondary buyers. 

“If you take all of the dry powder today in the secondary market it’s probably less than $40 billion of capital to invest, and this year we would expect $30 billion to be sold,” says David de Weese, partner at secondaries investor Paul Capital.

Despite the abundance of opportunity, there are some situations in which it can be advantageous to be a non-traditional buyer of secondaries, says de Weese. “Brokers will often go to these big limited partners in the hopes that they can find a buyer for the portfolio without bothering a secondary fund, just because they know they’re probably going to get less attractive pricing from the secondary funds.”

However, when it comes to large portfolio sales, large public pensions may find themselves at a disadvantage compared to secondary funds.

“The problem for [public pensions] is: if you’re not a dedicated secondary buyer, you probably don’t have the staff and the outreach to originate transactions. So you tend to be reliant on auctions that are brokered,” says de Weese.

As long as annual transaction volume continues on its upward trajectory, we’re likely to see more groups enter the secondary market – although the extent to which these non-traditional buyers will end up competing with the big secondaries funds on the largest deals remains to be seen.

In addition to SAFE, there are a number of other groups that have actively branched out into the secondary market in recent years. Here are a few of the most significant: 


Once an active investor in secondaries funds, the Canada Pension Plan Investment Board has transitioned to become a direct buyer of fund interests on the secondary market, targeting between C$25 million (€21 million; $25 million) and C$3 billion per deal.

The pension is acting as an anchor investor in the restructuring of US mid-market firm Behrman Capital’s $1.2 billion third fund, according to sources who confirmed prior media reports about the pension’s investment in Fund III. 

Behrman hired secondaries intermediary Cogent Partners to help shop approximately $750 million worth of fund interests. CPPIB originally agreed to make a $644 million commitment, fighting off a bid from rival Goldman Sachs, before ultimately increasing its commitment by a reported $100 million.

During the 12-month period ending 31 March 2012, CPPIB’s portfolio of secondary stakes grew from C$2 billion to C$2.7 billion (which according to the pension accounted for about 5 percent of the entire secondary market’s transaction volume during this period).

“Fiscal 2013 is expected to bring still greater focus on the secondaries market,” says a spokesperson for the pension.

CPPIB continues to hold “legacy” investments in secondaries funds comprising an additional C$1.47 billion. The pension has previously invested in funds managed by secondaries firms including Coller Capital, Partners Group and Paul Capital. 

CPPIB’s ‘funds and secondaries’ division is led by vice president Pierre Lavallée in Toronto and managing director Suyi Kim in Hong Kong, although its secondary investing activities specifically are led by senior principal Yann Robard, who previously worked at secondaries investor Paul Capital. 

CPPIB ended the second quarter of 2012 with about $166 billion of assets, of which $28 billion, or roughly 17 percent, are in private equity. Earlier this year, the pension named former executive vice president of investments Mark Wiseman as president and chief executive officer following the retirement of president and CEO David Denison in June.


Private equity advisory firm StepStone Group emerged as a significant new entrant in the secondaries market in 2009.

The firm is currently targeting $650 million for its StepStone Secondary Opportunities Fund II, which will include a $350 million commingled fund and $300 million of separately managed accounts. 

StepStone’s first secondaries fund collected $595 million, including separately managed accounts, and purchased 33 fund interests with an average size of $22 million and an average discount of 35 percent. The fund differs from typical secondaries funds in that it won’t buy large portfolios (i.e. dozens of fund interests at a time); instead it targets high quality assets at large discounts, usually with a transaction value of $50 million or less.

By restricting the amount of capital the firm raises for secondaries, StepStone is able to avoid participating in auctions and buying over-diversified pools of assets. In fact, the vast majority of its secondary deals are for one-off fund interests.

StepStone has also distinguished itself from other new entrants by building a large in-house team of experienced secondaries investors. The firm ramped up this area of its business in 2010 by acquiring secondaries group SilverBrook Private Equity and with it three veterans of the secondaries market: former Pomona executives Mark Maruszewski and Thomas Bradley and Michael McCabe, former vice president at Hamilton Lane. The three partners now manage StepStone’s secondary business alongside fellow partner James Gamett, formerly of Portfolio Advisors.

Including the four partners, the firm has 10 investment professionals dedicated exclusively to secondaries working from its offices in New York, San Diego, London and Beijing.

StepStone deploys about $6 billion per year in primary commitments to strategies including buyouts, distressed and venture capital, which helps drive the majority of the firm’s secondary deal flow. The firm oversees more than $50 billion of allocations.


The Abu Dhabi Investment Authority has reportedly purchased stakes in private equity funds managed by firms including Permira, Hellman & Friedman and Deutsche Bank. It prefers to invest between $45 million and $435 million per deal. 

ADIA is actively expanding its private equity team with the aim of increasing investments in the asset class. It is keen to ramp up both its primary and secondary direct investments.

Earlier this year, ADIA hired Christophe Florin from AXA Private Equity, while last year it hired Benjamin Weston, former chief executive of Merrill Lynch Alternative Investments. ADIA is reportedly looking to hire as many as 40 private equity executives as part of a concerted drive to increase its activity within the asset class.

Mohammad Anwer Farooqui heads the sovereign wealth fund’s secondaries and distressed investment activities, along with portfolio manager Humaid Bib Bishr.

ADIA’s private equity department has three investing activities: primary funds, secondary funds and co-investments.


Global investment advisor Hamilton Lane manages a series of funds dedicated to secondary investing and has more than $1.5 billion in secondary assets under management.

The firm’s secondary business leverages its global private equity platform and primary fund investment business to access secondary opportunities.  

Hamilton Lane is currently in market with its third secondaries fund, which is targeting $650 million. Its previous secondaries vehicle closed on $591 million, attracting commitments from US pensions including the Public Employee Retirement System of Idaho, The Employees’ Retirement Fund of the City of Dallas and the City of Burlington Employees’ Retirement System. 

Hamilton Lane’s secondary activities are managed by a dedicated secondary investment team including managing director Tom Kerr and chief investment officer Erik Hirsch. Since 2008, the firm has evaluated more than $100 billion in secondary opportunities and typically deploys between $200 million and $300 million per year.  


Last year, the $53 billion Virginia Retirement System hit the secondary market as a buyer for the first time, purchasing stakes in funds managed by firms including HarbourVest Partners, Natural Gas Partners and Novak Biddle Venture Partners. 

VRS bought roughly $23 million worth of secondary commitments in 2011 and has purchased $75 million in 2012, as of mid-August.

A presentation reviewing the retirement system’s private equity portfolio indicates that Virginia plans to continue engaging the secondary market, but only “when we have an edge” to “increase exposure to specific managers”. 

The retirement system has not specified whether it will enter the market as a seller, stating only that they will engage the secondary market opportunistically, according to a spokesperson for the retirement system.

Virginia’s private equity activities are led by director of private equity John Alouf. The system has $4.8 billion, or 9 percent of its assets, committed to the asset class.