Stuck in a 10-year private equity fund with no exit? The $130B secondary market is your escape hatch. This isn’t just a niche strategy, it’s the liquidity revolution transforming private equity.
If you’ve ever dived into the world of private equity, you’ll know it has its own unique language, often a heady mix of finance jargon and insider lingo. Among these terms, there’s one phrase that has been buzzing louder than others over the last decade: private equity secondaries, or simply “secondaries”.
But what are they exactly? Why do investors, fund managers, and institutions seem increasingly obsessed with them? And why does this market, once seen as a niche corner of finance, now represent hundreds of billions of pounds in transactions annually?
What do we mean by “Private Equity”?
Private equity (PE) is, in the simplest terms, investment in private companies, businesses that are not listed on public stock exchanges. Investors pool money into private equity funds, which are managed by professional fund managers.
These managers then deploy that capital into ambitious companies, often helping them grow, restructure, or expand.
Investors commit their money for long periods, usually 10–12 years, because private companies don’t scale at the speed of start-ups on steroids. Returns are typically realised years later, when the private equity fund sells its stake in the company through strategies like:
- IPO (Initial Public Offering): Selling shares to the public for the first time.
- Trade sale: Selling to another company.
- Secondary buyout: Selling to another PE fund.
The problem: Illiquid
Here’s where the problem kicks in.
Private equity investments are illiquid. That means once you’ve committed your money to a fund, you can’t touch it for years. No early exits, no pulling cash out halfway through unlike with stocks, where you can simply sell your shares on an exchange at any time.
Imagine locking your money away for ten years, with no flexibility if your financial circumstances change, or if you simply spot a better investment opportunity elsewhere.
For institutional investors like pension funds, sovereign wealth funds, family offices, and even high-net-worth individuals, this rigidity can become problematic. Life happens, assets get rebalanced, investment priorities shift, or maybe liquidity is urgently needed for other commitments.
And here’s where the secondary market comes in.
What are private equity secondaries?
In the world of private equity, a secondary transaction refers to the buying and selling of pre-existing investor commitments in PE funds.
Let’s simplify:
- Primary investment: An investor commits money to a new private equity fund that is being launched.
- Secondary investment: An investor buys someone else’s stake in an existing PE fund.
Think of it like a resale market for private equity stakes, much like buying a second-hand car, but instead, you’re buying into a fund that already owns a portfolio of companies.
Why would someone sell their stake?
Why would any rational investor give up a slice of potentially high-return private equity pie? Several reasons pop up:
- Need for liquidity: A pension fund may suddenly need to free up cash to meet obligations. Instead of waiting years for the PE fund to wind down, they can sell their stake in the secondary market.
- Change in strategy: An institution may decide to reduce exposure to a particular geography, sector, or asset class because of shifting priorities.
- Regulatory requirements: Sometimes, regulations change, especially for banks and insurers, forcing them to rebalance or reduce illiquid holdings.
- Portfolio management: Selling older commitments allows investors to recycle capital into newer, fresher funds with more years of growth ahead of them.
Why would someone buy?
If sellers are motivated by liquidity needs or portfolio reshuffling, then who’s on the other side of the table, happily buying? Secondary buyers (often other institutional investors, secondary-specialist funds, or asset managers) see value in entering existing funds for several reasons:
- Discounts: Stakes are often sold at a discount to their net asset value (NAV). This means the buyer is getting the assets cheaper than their book value.
- Reduced blind pool risk: Unlike primary investors who buy into a fund with no idea what specific companies it will hold, secondary investors already see the fund’s portfolio—they know what they’re getting into.
- Shorter duration: Instead of waiting ten years, secondary buyers might catch a fund in year five, meaning their returns arrive sooner.
Different types of secondaries
It’s worth knowing that not all secondaries are the same; different deal structures have emerged as the market matured.
1. Traditional LP transactions
This is the most straightforward type, Limited Partners (investors) selling their fund commitments to other investors.
2. GP-led secondaries
In recent years, a new form of secondary has grown rapidly: GP-led transactions. Here, the private equity fund manager (the General Partner, or GP) itself facilitates a secondary process. For example:
- A fund owns a particularly valuable company that it doesn’t want to sell yet.
- Instead of liquidating, the GP asks investors: “Would you like to cash out now, or roll into a continuation vehicle to hold the asset longer?”
- Secondary buyers then provide liquidity for the exiting investors.
3. Complex structures
Beyond basic LP stakes and GP-led deals, we now see all sorts of hybrids, preferred equity deals, structured secondaries, synthetic fund stakes. The market is increasingly creative to meet investor-specific needs.
Why are private equity secondaries important?
Okay, now we’re getting to the heart of the matter, why does this market matter so much?
Here are a few reasons:
- Liquidity in an illiquid world: Investors no longer have to treat private equity as a jail sentence for their capital. Secondaries provide an exit route long before fund maturity.
- Portfolio risk management: Institutions can actively reshape their exposure, tilting towards certain strategies, geographies, or managers, without waiting a decade.
- Attractive entry points: For buyers, secondaries are a way to get exposure to top-tier funds at potential discounts, with greater visibility and shorter holding periods.
- Market maturity: The existence of a thriving secondary market itself attracts more investors into private equity, because it softens the fear of long illiquidity.
- Capital recycling: Sellers can redeploy capital into newer funds, making the ecosystem more dynamic and efficient.
Risks and challenges
Of course, nothing is a free lunch in the world of finance. Private equity secondaries also come with risks:
- Pricing uncertainty: NAVs are subjective, and getting a fair price requires significant due diligence.
- Market cyclicality: In downturns, discounts widen, making selling painful.
- Complexity of GP-led deals: Continuation vehicles can introduce conflicts of interest (GPs wanting to hold assets longer vs. LPs wanting liquidity).
- Concentration risk: Buyers may inherit concentrated exposure to a few assets.
Still, as the market develops, governance, transparency, and sophistication are improving.
The future of secondaries
The trajectory looks strong:
- Continued Growth: Many experts expect the secondary market to exceed £200–250 billion in annual volumes within the next 5–7 years.
- Broader Structures: Innovation will continue, more GP-leds, hybrids, and structured offerings.
- Greater Accessibility: While still dominated by institutions, there’s a chance high-net-worth individuals and even retail investors will get indirect access.
- Technology and Transparency: Data tools, analytics, and digitisation may make pricing and trading smoother, almost exchange-like (though probably never as liquid as public markets).
Final thoughts
Private equity secondaries are no longer an obscure corner of the investment world. They’ve become a mainstream, essential mechanism that keeps the PE ecosystem liquid, flexible, and appealing to investors big and small.
For sellers, they provide exits long before the fund’s official maturity. For buyers, they offer discounted, transparent, and shorter-term exposure to the private markets. And for the industry as a whole, they reduce risk, recycle capital, and make private equity far more accessible.
In short: secondaries are the safety valve of the private equity machine, and without them, the system would be far clunkier, riskier, and less dynamic.
Himani Verma is a seasoned content writer and SEO expert, with experience in digital media. She has held various senior writing positions at enterprises like CloudTDMS (Synthetic Data Factory), Barrownz Group, and ATZA. Himani has also been Editorial Writer at Hindustan Time, a leading Indian English language news platform. She excels in content creation, proofreading, and editing, ensuring that every piece is polished and impactful. Her expertise in crafting SEO-friendly content for multiple verticals of businesses, including technology, healthcare, finance, sports, innovation, and more.
