Private equity secondaries are meeting the moment

The measure of the health of any market is whether a willing buyer can find an interested seller. That’s happening in today’s secondary market, and it’s happening at a scale that stands in contrast to other capital markets.

Key takeaways

  • The secondary market is one of the few in which liquidity can be achieved today.
  • Secondaries investors—suppliers of liquidity—stand to benefit from the strong demand for it.
  • Buying opportunities abound: Attractive discounts to net asset value are now available for traditional LP secondaries, and the GP-led market has never seen better deal flow.

The private equity secondaries market is wide open

We’re tiptoeing through a moment of great uncertainty. Is inflation coming down? How high will interest rates go? What’s the risk of entering a full-blown banking crisis? Will the U.S. government default on its obligations? Is the next economic recession nearly on us? If so, how severe is it likely to be? We don’t know the answers, but we do know that the questions are dampening activity across virtually all sectors in all markets.

Not so in the private equity secondaries market. Experiencing its two highest annual volumes ever—$132 billion in 2021 and $108 billion in 2022—the secondary market is one of the few in which much-needed liquidity can reliably be achieved today.

From the top down, 2023 is likely to exceed $100 billion in transaction volume yet again. From the bottom up, the number of transactions coming to the market right now is the highest we’ve seen in our 25 years of experience as secondary market participants. Amid the macroeconomic uncertainty—perhaps partially because of it—the secondary market is open for business.

Private equity secondaries stand poised for another big year

Global secondaries market transaction volume ($ billion)

Private equity secondaries stand poised for another big year. This chart shows that global secondaries market transaction volume has grown from $2 billion in 2002 to an estimated $120 billion in 2023.
Source: Evercore, Jefferies, PitchBook, December 31, 2022. GP refers to general partner. LP refers to limited partner.

Demand for liquidity favors secondary investors deploying capital now

Why such robust secondary market activity? In a phrase, the need for liquidity. The denominator effect—when falling public equities render institutional investors overallocated to private equity overnight—is driving sellers to the traditional limited partner (LP) secondaries market. We’re seeing a massive overhang of LP-led deals given ongoing reallocations.

In the general partner (GP)-led secondaries market, we’re seeing the number of deals offered continuing to increase month by month, fueled by growing sponsor enthusiasm, broadening ranks of dedicated secondary bankers, and shrinking liquidity options in other exit paths, including initial public offerings and merger-and-acquisition activity. Unable to rely on these traditional forms of liquidity right now, the private equity industry needs secondaries investors more than ever.

Secondary investors stand to benefit as other exit routes close

U.S. private equity exit activity by quarter

Secondary investors stand to benefit as other exit routes close. This chart shows that private equity exit activity has decreased rapidly since 2021.
Source: PitchBook, March 31, 2023.
“Secondaries investors coming to the table today are doing so from a position of greater strength.”

As a result, the secondaries investors coming to the table today are doing so from a position of greater strength. In some cases, deferred payments are being deployed, leading to higher target internal rates of return, and in other cases, secondary investors are being invited to customize their portfolios and name their price. In short, it’s a good time to be a secondary investor ready to deploy capital.

Deeper discounts, stronger deal flow, and a large-to-mid migration

The LP market is creating attractive buying opportunities for investors seeking to build their allocations to private equity in general or specific strategies and managers. Pricing has fallen significantly below net asset value, with the degree of discount depending on the sector, strategy, and manager. LPs that need to sell are selling what they can—and what they can sell most easily now is quality. In today’s market, a high-quality buyout portfolio can be purchased at an attractive discount, although capturing the most favorable margin requires structuring skills and information access that only a dedicated secondary investment manager can provide.

Similarly, pricing for GP-led transactions has moved measurably with an improvement in entry multiples on top of terms that are now more investor friendly. Secondary investors are demanding greater concessions for concentrated positions being moved into continuation vehicles. GP-leds are also experiencing a classic mix shift: Today we’re seeing fewer $1 billion single-asset continuation vehicles and more sub-$500 million multi-asset continuation vehicles. No longer are large-cap sponsors dominating the field, as middle market and lower middle market sponsors seize an increasing share of the secondary market’s deal count. While we’ve never seen better deal flow in the GP-led market, it has also become increasingly difficult for investors to participate in that deal flow without dedicated resources. Now more than ever, secondary investment success requires an aggressive origination strategy, savvy negotiating tactics, and sharp underwriting skills.

“Few other markets incorporate creativity, innovation, and flexibility in the same manner as the secondary market.”

Calling all liquidity providers: carpe diem

The measure of the health of any market is whether a willing buyer can find an interested seller. We are indeed seeing that happening in today’s secondary market, and it’s happening at a scale that stands in contrast to other capital markets. A steady flow of secondary market deals continues to pour into the private equity industry, and a steady flow of secondary deals continues to get done.

That’s not a surprising outcome. The secondary market is often viewed as solution-oriented liquidity, delivering bespoke capital market capabilities that address specific needs. Few other markets incorporate creativity, innovation, and flexibility in the same manner as the secondary market, a key feature that allows it to function so well amid the uncertainties of the moment. The secondary market’s resiliency through the ups and downs of the cycle can create relief for those seeking to reduce risk—and an attractive entry point for those ready to deploy dry powder.

So, what’s required for success? From our perspective, a specialized knowledge base and the technical chops to get good deals done. In addition, an information advantage that accompanies a line of sight into sponsor activity through adjacent angles, which should include a primary, co-investment, and direct lending lens, is needed. Most important, successful secondary investors—particularly GP-led secondary investors—will seek high-quality assets backed by skilled sponsors in deals demonstrating mutually beneficial alignment.

This very moment represents a deployment opportunity that secondaries investors haven’t seen in nearly a generation. The need for liquidity has intensified following years of easy credit and record-breaking growth in primary commitments. With so much pent-up demand for liquidity, and a declining supply of it through traditional exit activity, current dynamics point to an undercapitalized market opportunity for secondary investors who know exactly what to look for, where to find it, and how to secure it on their own terms. But that window of relative advantage for buyers won’t remain open indefinitely. It’s time for secondary investors to seize the day.

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Paul Sanabria

Paul Sanabria, 

Global Co-Head of Secondaries, Private Markets

Manulife Investment Management

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Jeff Hammer

Jeff Hammer, 

Global Co-Head of Secondaries, Private Markets

Manulife Investment Management

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