Interview Synopsis

Private equity secondaries volume to grow faster than primaries

  • Private Equity
  • Multi Sector
  • Global

The private equity secondary market has been an underserved asset class to institutional investors, but this is changing as investors seek greater liquidity in private markets. Given the significant change in inflation as well as in the rate environment, investors have been more open to understanding the asset class, a relationship manager at a global financial advisory and asset management firm told Third Bridge Forum. The market could reach USD 500bn by 2030 – from only USD 150bn in 2021, the specialist said. 

Inflation and rate increases making investors more open to private equity secondary market

Although there has been a slowdown in the pace of private equity investment and capital calls, there is no shortage of opportunities, we were told. But to make those investments, there has been a heightened focus on due diligence to ensure investee companies have strong competitive moats and the investor can truly add value. “The number of deals will probably start to decline, but it’s not really because of a change in demand or in supply in that sense,” the expert said. 

Against a backdrop of prolonged market uncertainty, secondaries volume should grow faster than primaries as investors seek private market returns with shorter lock-up periods, according to our Interview. “The one thing that investors are definitely concerned about is making sure that they can meet their unfunded obligations regardless of the market volatility that we are currently experiencing,” the specialist told us.

“The primaries market does have its place within portfolios, but… over the next 1-3 years, there’s going to be more of a focus on how investors can gain access to private markets through secondaries, where they will have a shorter time horizon to start to see the benefit being reaped within their portfolios.”

The specialist said investors seem willing to evaluate primary market opportunities, but these would have to offer a “significant discount” and “generous investment terms” in order for LPs to look at the primary pipeline “with as much excitement and interest” as is the case with the secondary space today.

In terms of vintages, some have transacted with significant discounts, we heard. In Europe, there is a bias towards significant haircuts, with the specialist believing there are good opportunities in Europe and LATAM. “Within Europe, there’s definitely a strong bias towards more significant haircuts, given just how much progress has already been made within impact investing,” our expert said. “But then also, when I look at just how much change is happening within the LATAM space as well, that’s an area that has got even more opportunities than have probably been around for the last five years at least.”

The Interview also discussed how regulatory (Basel) shifts could lead to a flurry of forced sellers if funds are required to hold higher levels of capital in more liquid assets, with the expert noting there is a strong focus on stress testing. “I definitely would see forced sellers be portfolios that have got liquidity issues, they may struggle. They would be looking to redeem some of their investment, as well as to be a lot more open in terms of just the transaction price…”

In part two of the Interview, the specialist went into more detail about the uncertainty that has gripped public markets and which will continue to do so for “the next year or two as we’re going through this real shift in economic regime”.

Meanwhile, after an uncertain 2022 in terms of transaction volume, they expect the pace to start picking up in Q3 and Q4 2023 if the economy stabilises. This will be particularly apparent in Europe, we heard, “where some countries have already gone into deeming themselves to be in a recession, so they are already at the bottom of where the market potentially thinks we can be”.

Click here and here to access all the human insights in Third Bridge Forum’s Private Equity Secondaries Market – Future Deal Volume and Valuations Interviews – part one and two respectively.

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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