Private equity secondaries

The secondary market allows private markets participants, investors, known as limited partners or LPs, to exit early from their investment commitments; and managers, known as general partners or GPs, to create liquidity for their LPs.

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If and when investors’ priorities and strategies change over time, as they might (bearing in mind our market only churns around 2% of the overall stock), the secondary market allows them to exit their commitments before the end of the fund’s life and redeploy the proceeds.

In periods of economic distress or volatility, secondary transactions may be initiated by over-leveraged, capital poor, or covenant-constrained investors, any of whom may find themselves with pressing liquidity needs.

After an economic downturn there will likely be investors who wish to re-shape their portfolios to respond to new economic realities, a strategic portfolio review, or changes in the investment mandate or business model.

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Today’s investors are more proactive in managing their portfolios than in the early days of private markets and will look to take advantage of good liquidity to optimise their own opportunity cost.

Secondary market transactions that cater for investors’ strategic challenges are usually significantly more complex than the standard sale-and-purchase of limited partner positions in funds.

Coller’s own investments are customised to each seller’s unique needs, and they often involve secondary market innovations.

01:48 – 02:38

Investors have increasingly recognised the benefits of secondary funds in providing exposure to private markets across economic and market cycles.

Typically, secondary funds can mitigate the J-curve effect through discount and because they acquire positions in funds whose portfolio companies are closer to exit.

They also, in principle, return cash faster than buyout funds, meaning investors receive distributions earlier, reducing capital at risk.

Secondary funds can also offer investors broad diversification by vintage year, investment strategy, geography, industry, and fund manager.

Finally, because the assets have been owned by a private equity fund for some time, secondary managers understand more about the investment resulting in reduced blind pool risk.

02:39 – 04:09

The secondary market has experienced almost continuous rapid growth over the last decade, as private markets themselves have grown in their scale and scope.

Originally the secondary market was restricted to the sale and purchase of LP interests, in either individual funds, or portfolios of funds. So-called LP-led transactions.

The market has since evolved to include interests in private assets that were not held within a private fund. These are known as direct secondaries.

In recent years we have seen transactions led by the fund managers themselves – known as General Partners, or GPs, become an increasingly important part of the market.

So-called ‘GP-led’ transactions involve a fund manager partnering with a secondary firm, like Coller Capital, to provide liquidity options to the investors and maximise the value of portfolio assets that may need more time and investment than originally planned.

The industry has matured such that today we are now also seeing private credit secondary funds come to market. Coller Capital raised one of the largest credit secondary funds raised with $1.45 billion including co-investment vehicles.

We see few barriers to future growth for Secondaries, with continued diversification within all strategies, including real assets. If market volume grows in line with its historical rate, we estimate it becoming a half a trillion market by 2030.

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Coller Capital as an independent, specialist investor focused entirely on the secondary market for over 30 years, is widely recognised for making investments that have redefined the scope of secondary transactions.

Today we have one of the largest teams dedicated to secondaries, around 80 professionals in total. We believe that, especially in today’s market, our reputation as a solver of complex liquidity challenges, combined with the size of our secondary funds and team, makes us a partner of choice in Secondaries.