The evolution of secondaries

Different crises have led to evolutions of the secondaries market, none more so than the global financial crisis of 2008. The market today is more vibrant, diverse and integrated than ever before, write Jeff Hammer and Paul Sanabria (pictured).

Until the financial crisis of 2008, the market for illiquid financial assets had developed in an almost predictable fashion: a global economic event would cause a liquidity crisis that would create an over-supply of specific financial assets and would be followed by, after a brief market pause, the emergence of specialist investors who would purchase these assets.

The most recent global financial crisis catalysed a different sort of market development. Due to the fact that liquidity was a major driver and de-leveraging occurred on a global basis across sectors, many different types of assets tumbled onto the secondary market. This led previously narrowly focused secondary market investors to broaden their scope to compete with one another for transactions. In effect, the structure of the secondary market changed, as individual sub-markets converged into one, large secondary marketplace. 

This convergence, combined with the never-ending search for higher returns, has created a new type of institutional investor that is rapidly becoming a fixture in the increasingly frantic global hunt for higher returns. This “new age” secondary investment organisation, regardless of its equity, debt or real estate heritage, is no longer limited to relying upon its specialist knowledge in a specific asset class, but rather is acting as a true opportunistic financial investor in the global asset bazaar. Increasingly, we are seeing financial sponsors join the ranks of these new investors, forming dedicated private equity secondary funds to find returns in distressed secondary assets. Will that trend continue in private equity?

From crises emerge new opportunities

First, what do we mean when we refer to the “secondary market”? Broadly speaking, this market is characterised by assets that are illiquid in nature – non-exchange-traded, low-trading-volume assets. These include structured finance securities, LP interests, minority equity positions, hedge fund side pockets and corporate debt but also exotic assets such as life settlements, operating leases, patent portfolios and mining rights, among others. 

Jeff Hammer

The market for such assets – both the creation of supply and the demand that followed – often developed from an economic shock to the system (if not an outright crisis). 

For example, the junk bond market crash in the late 1980s and the savings and loan crisis that followed saw banks, for the first time, selling portfolios of assets in large quantities. Massive overinvestment by S&Ls in a range of securities naturally created a buyer’s market as these entities were forced to put up these securities for sale. 

The response from the buyside was to create opportunity funds that focused on specific assets, such as dedicated real estate funds, that eventually became brand-name, classic secondary market players such as Goldman Sachs’s Whitehall funds, Morgan Stanley’s MSREF funds and Colony Capital among others. These funds were unique in that they were opportunistic, but they were narrowly focused on real estate-related assets such as commercial real estate securities, physical real estate, and the like.

Similarly, the Asian financial crisis of the late 1990s and the 1998 currency collapse again saw new types of illiquid assets enter the market and another group of specialist buyers emerge. This time, various loans and debt securities were put up for sale and dedicated investors such as Avenue Capital, Lone Star, and others raised money to buy it.

Between these two periods was what one might call the dawn of the modern private equity secondary market. What started as a small, niche activity in the 1990s grew into a large investment sector with the bursting of the tech bubble in 2001. This “tech wreck” of 2001 and accompanying correction pushed private equity LP interests and minority equity positions onto the market. This crisis was about equity, not debt, and was centered in the US and Western Europe. As banks made strategic decisions to move away from investing in equity, dedicated secondary investors such as Landmark, Lexington, and Coller Capital grew rapidly to absorb the surplus equity assets. In addition, investment banks such as Goldman Sachs and Credit Suisse launched dedicated secondary funds to purchase equity and partnership assets at fire-sale prices.

A new kind of crisis, a new evolution: convergence

In these earlier crises, the nature of the crisis itself and the assets that became illiquid were all disparate and disconnected. Even the crises themselves, though eventually felt globally, were initially geographically specific (the S&L crisis in the US, the currency crisis in Asia, etc). 

The financial crisis of 2008 was so massive that all factors came into play at once. The crisis itself was immediately global in nature, and while the crisis was largely debt-driven, illiquid assets could be found in every asset class. Supply, demand and transaction volume was high across the board as institutions were forced to divest assets to address liquidity problems. This systemic crisis produced an entirely different sort of development in the secondary markets: the breakdown of narrow investment theses and the convergence of capital focusing on a broad range of assets. 

The 2008 crisis affected all asset classes, everywhere; the resulting search for return saw real estate funds buying


corporate debt, corporate buyers looking at commercial real estate, dedicated secondary equity funds buying credit pools, sponsors buying distressed debt and non-performing loans, and so on. A market that previously could be sketched as a group of self-contained, small circles now looked more like a bunch of large, overlapping circles without clear boundaries. 

New breed of secondary investor: the opportunistic secondary fund

This convergence has created an entirely new secondary market landscape. The search for high returns in a challenging economic environment has prompted strategic shifts among the various firms pursuing secondary deals. More and more, traditional, narrowly focused firms have pushed into new territory, creating fresh competition for traditional investors in a particular space. Paul Capital’s move into the market for hedge fund assets and credit instruments is a clear demonstration of this trend. Lone Star, a traditional real estate loan portfolio buyer, provides another example with its lateral move into the market for corporate credit with the acquisition of a corporate loan portfolio and accompanying team from CIT. 

In addition, new entrants have come onto the scene who will further change the competitive dynamic in the secondary market. For example, The Blackstone Group’s launch of the Blackstone Tactical Opportunities Fund is a sure sign the secondary market financial assets are becoming increasingly interesting to traditional multi-line asset managers. Groups like Blackstone, BlackRock, Carlyle, Pimco and others are uniquely positioned to become bona fide competitors against specialist investors: they are already well-equipped with the expertise, market transparency and aggressiveness and they do not lack cash to put to work in new markets.

The question now is whether more firms will rise to the challenge – or opportunity – and broaden their investment approach and increasingly compete directly for secondary market assets. Will the broader secondary market be co-opted by other, existing large pools of capital? 

Dedicated private equity secondary funds, credit hedge and special situation funds, among others, all have amassed billions of dry powder looking for high-returning investment opportunities. It remains to be seen how dominant these new investors will become, but our expectation is the trend will continue. Large asset managers will almost surely follow if the opportunity for higher returns is evident.


As a result of the financial crisis, the secondary market has been through a period of massive expansion and unforeseen convergence. The result is a marketplace that is more vibrant, diverse and integrated than ever before. With new entrants and more capital, the secondary market looks to play a prominent role in the global search for superior returns for a long time to come – and financial sponsors will continue to be part of that search.

Jeff Hammer and Paul Sanabria are the co-heads of secondary advisory at Houlihan Lokey. Statements and opinions expressed herein are solely those of the authors and may not coincide with those of Houlihan Lokey.