Private Equity Secondary Market

In finance, the private equity secondary market (also often called private equity secondaries or secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market; however there is a robust and maturing secondary market available for sellers of private equity assets.Driven by strong demand for private equity exposure, a significant amount of capital has been committed to dedicated secondary market funds from investors looking to increase and diversify their private equity exposure.
Secondary market participantsLeading secondary investment firms (current dedicated secondary capital in excess of $2 billion) include: AlpInvest Partners, AXA Private Equity, Coller Capital, HarbourVest Partners, Lexington Partners and Pantheon Ventures.
Other major independent secondary firms (excluding banks, $1 - $2 billion of current dedicated capital) include Adams Street Partners, Landmark Partners, Newbury Partners, Partners Group, Paul Capital Partners and Pomona Capital.
Additionally major investment banking firms, including Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers and Morgan Stanley have active secondary investment programs and other institutional investors typically have appetite for secondary interests.
Within the secondary arena, certain smaller specialized firms, including Saints Capital and W Capital, focus exclusively on purchasing portfolios of direct investments in operating companies (referred to as secondary directs. Other niches within the secondary market include purchases of interests in fund-of-funds and secondary funds (Montauk Triguard) and purchases of interests in real estate funds (Liquid Realty and Madison Harbor Capital).
While intermediation in the secondary market is still not as pervasive as in corporate mergers and acquisitions, leading advisors to secondary market sellers include investments banks (Credit Suisse and UBS), dedicated boutique firms (Cogent Partners and Fidequity), electronic exchanges (NYPPE), as well as established fund placement agents (Campbell Lutyens, Probitas Partners and Triago).
Types of Secondary TransactionsSecondary transactions can be generally split into two basic categories
Sale of Limited Partnership Interests - The most common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund(s). Nearly all type of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund. In addition to traditional cash sales, sales of limited partnership interests are being consummated through a number of structured transactions:
Structured Joint Ventures – Includes a wide variety of negotiated transactions between the buyer and seller that typically is customized to the specific needs of the buyer and seller. Typically, the buyer and seller agree on an economic arrangement that is more complex than a simple transfer of 100% ownership of the limited partnership interest Securitization – An investor contributes its limited partnership interests into a new vehicle (a collateralized fund obligation vehicle) which in turn issues notes and generates partial liquidity for the seller. Typically, the investor will also sell a portion of the equity in the leveraged vehicle. Also referred to as a collateralized fund obligation vehicle. Stapled Transactions – Occurs when a private equity firm (the GP) is raising a new fund. A secondary buyer purchases an interest in an existing fund from a current investor and makes a new commitment to the new fund being raised by the GP. Sale of Direct Interests – Secondary Directs or Synthetic secondaries, this category refers to the sale of portfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions. Typically this category can be subdivided as follows:
Secondary Direct – The sale of a captive portfolio of direct investments to a secondary buyer that will either manage the investments themselves or arrange for a new manager for the investments. Synthetic Secondary / Spinout - Under a synthetic secondary transaction, secondary investors acquire an interest in a new limited partnership that is formed specifically to hold a portfolio of direct investments. Typically the manager of the new fund had historically managed the assets as a captive portfolio. The most notable example of this type of transaction is the spinout of MidOcean Partners from Deutsche Bank in 2003. Tail-End – This category typically refers to the sale of the remaining assets in a private equity fund that is approaching, or has exceeded, its anticipated life. A tail-end transaction allows the manager of the fund to achieve liquidity for the fund's investors.