The quiet giant of private markets: why secondaries are gaining ground

Private equity secondaries rarely attract the same attention as headline buyouts or venture capital deals. Yet behind the scenes, the market has become one of the most important mechanisms supporting liquidity across private markets.

For David Hallifax, head of Australia and New Zealand private wealth at Coller Capital, the concept itself is far simpler than many investors realise. In fact, most investors have already participated in secondary transactions without thinking about it.

“If you’ve ever bought a property from someone or bought shares on the stock market, you’ve participated in a secondary transaction,” Hallifax says. “The same principle applies in private markets.”

Understanding that simple dynamic helps explain why secondaries have become such a critical component of the private markets ecosystem.

Liquidity in a long-term asset class

Private equity funds are designed to operate over long time horizons. A typical primary fund may run for at least 10 years, with extensions pushing that lifecycle out to 12, 13 or even 15 years in today’s market.

While that structure allows managers to build and exit investments over time, it also creates a challenge: investors may need liquidity before a fund reaches its final exit stage.

That is where secondaries play a critical role.

“All we’re doing as a secondaries manager is buying a private equity fund or a group of funds from an existing investor and giving them liquidity,” Hallifax explains. “In return, we receive a diversified portfolio of private equity companies.”

Liquidity typically comes at a price. Secondary buyers usually acquire assets at a discount to their reported net asset value (NAV) figure. That discount represents the cost sellers are willing to pay to access capital earlier than originally planned.

For secondary investors, that discount can provide an immediate uplift to potential returns.

Why institutions sell

Hallifax notes that sellers generally fall into two categories: ‘motivated’ sellers and ‘distressed’ sellers. Motivated sellers dominate the market. These investors may simply need to rebalance portfolios or adjust their investment strategies.

For example, consolidation within Australia’s superannuation sector has created situations where merged funds suddenly hold overlapping private equity managers. Selling some of those positions through the secondary market can streamline portfolios and reduce administrative complexity.

Changes in asset allocation can also drive sales. If an institutional investor decides to reduce its private equity exposure, selling positions through secondaries provides a practical way to rebalance.

“Just because an investor is selling into the secondary market does not mean they have lost money,” Hallifax says. “In many cases they have held the assets for several years and generated strong returns before deciding they need liquidity.”

Distressed sellers also appear in certain market environments. Regulatory changes, financial crises or institutional balance-sheet pressures can all create situations where investors are forced to sell assets quickly.

Another common factor is the so-called ‘denominator effect.’ When public markets fall sharply, the proportion of private assets within a portfolio can increase automatically. Investors then sell private equity stakes to restore their target allocation.

While less common, those situations often produce deeper discounts for secondary buyers.

Diversification and risk mitigation

For investors entering private markets, secondaries offer a number of structural advantages compared with primary private equity funds.

One of the most significant is the mitigation of the so-called ‘J-curve.’ Primary funds often take several years to deploy capital into investments, meaning early returns can be negative before portfolio companies mature.

Secondaries, by contrast, typically acquire portfolios that are already partially invested and generating cash flows.

“We can review every individual company within a portfolio before we buy it,” Hallifax says. “That means there’s no ‘blind pool’ risk and we’re not waiting several years for capital to be deployed.”

Diversification is another key benefit. Large secondary portfolios can contain exposure to hundreds or even thousands of underlying companies.

Coller Capital’s strategies, for example, can include more than a thousand portfolio companies across dozens of private equity managers.

That breadth reduces the impact of any single company underperforming. It also narrows the dispersion of potential outcomes relative to traditional private equity funds.

Historically, Hallifax says secondary strategies have delivered mid-teen annual returns over long periods while maintaining relatively low volatility.

A growing market within private capital

The scale of the secondary market has expanded dramatically in recent years. Annual transaction volumes have already surpassed US$200 billion ($286 billion) and are projected to reach roughly US$500 billion ($714 billion) by 2030.

Growth in the secondary market closely tracks the expansion of private markets more broadly. As the global private equity industry grows, so too does the demand for liquidity solutions.

“You have to have a strong primary market in order to have a secondary market,” Hallifax says. “With private equity now representing trillions of dollars globally, secondaries have become an integral part of that ecosystem.”

The structure of the market is also evolving. Historically, most secondary transactions involved investors selling fund stakes to other ‘limited partners,’ or investors, known as LP-led transactions.

More recently, so-called GP-led transactions have become more common. In these deals, the ‘general partner,’ or private equity fund manager, transfers existing assets into a ‘continuation vehicle’, allowing the manager to hold strong-performing companies for longer while providing liquidity to existing investors.

A gateway to private markets

For wealth investors and advisers, secondaries are increasingly being viewed as a practical entry point into private equity.

Institutional investors have long used the strategy to build diversified private equity portfolios quickly. The same principle can apply to private wealth portfolios that may lack the scale to construct large direct programs.

By buying seasoned portfolios, secondaries provide exposure to a wide range of companies, sectors and geographies from day one.

Hallifax believes that structure makes secondaries particularly attractive as private markets allocations expand.

“If you’re entering private markets for the first time, secondaries give you instant deployment and diversification,” he says. “They can be a very effective way to build a private equity allocation without taking on concentrated risk.”

As private markets continue to grow, the role of secondaries is likely to expand alongside them. What was once a niche corner of the market is now becoming a core mechanism supporting liquidity, diversification and portfolio construction across the private-capital landscape.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.