CONTRIBUTORS
Clark Peterson
Partner
Lexington Partners
Preview
Global secondary transaction volume has grown rapidly in recent years. Lexington estimates secondary industry volume reached a record high of US$128 billion in 2021 and exceeded US$100 billion in 2022 and 2023. Several factors are driving this growth, including primary fundraising volume, limited partners (LPs) seeking liquidity in the absence of distributions, and general partner (GP)-led transactions. In 2024, the secondary market remains undercapitalized versus a significant supply of deal flow, setting the stage for a robust buyer’s market.
In this paper, we begin with a high-level primer on the market, how it works, and its potential benefits as an investment strategy. Later, we will explore the opportunities in the secondary market in more depth.
Key sections we cover:
- What is a secondary transaction in the private equity market?
- Why invest in secondaries?
- Global secondary market meaningfully undercapitalized
- Growing inventory and increasing turnover drive secondary market growth
- Recent uptick in discounts
The global secondary market has grown over the past three decades primarily as a result of the increased supply of capital committed to private investment funds, the trend towards more active management of these commitments, the desire among select investors for earlier liquidity, and the expansion of the sponsor-led opportunity set. In today’s environment, LPs are seeking liquidity in the absence of distributions and are rebalancing portfolios versus allocation limits, while GPs are facing pressure to provide liquidity options to their limited partners. As such, we believe the backdrop for the secondary market continues to remain attractive.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal.
Alternative strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. Active management does not ensure gains or protect against market declines.