Twenty-five years ago a nascent industry developed to provide liquidity to investors in private equity who had previously bought and held illiquid private equity assets. The secondary market, as it is called, is the only way for investors to exit early from their private equity investments and its growth is a natural consequence of today’s immense pool of outstanding private equity commitments.
Since then, the market, which was measured in the millions, has surpassed $40 billion in annual transaction volume. Sellers are now using the market as a tool to sculpt their portfolios. In cases where investment objectives have changed, investment professionals have moved on, or investors have decided not to back sponsors for a future fund, the secondary market has provided a solution.
The types of transactions involved have also changed. Initially the sole focus was to obtain limited partnership interests primarily in buy-out funds. Some secondary buyers also bought interests in venture, mezzanine or credit funds. Purchasing fund interests still accounts for the majority of the market, but about 15 years ago Coller Capital and others pioneered buying direct portfolios of private companies. Typically, these were individual company interests on bank or corporate balance sheets that were not in an existing fund structure. These transactions were accomplished by acquiring and transferring these interests into a newly created entity employing a management group – effectively a build versus buy strategy.
The secondary market has continued to innovate and in recent years the market has widened to include other areas of private equity, such as real estate and infrastructure. It has also expanded its geographic reach. Although the bulk of historic purchases have been in the US and Western Europe, transactions have occurred in a number of emerging markets, making the secondary market truly global.
Looking forward, investors continue to find private equity returns attractive, as is the knowledge that there is an ability to liquefy some or all of their private equity investments. This, coupled with the maturing of private equity from the pre-global financial crisis period, should see a good supply of interests in the secondary market for some time to come.