Over the years, the secondary market has become increasingly important for a growing number of investors because of its potential to offer early exits from illiquid portfolios and easy adjustment of portfolio management objectives.
Preqin’s Secondary Market Monitor currently tracks 85 investors that are highly likely to sell fund interests on the secondary market over the next 12 months, having stated an intention to do so either through direct contact or via the public domain.
As shown in the chart above, public pension funds make up the largest proportion (18%) of LPs that are highly likely to sell fund interests on the secondary market. Over two-fifths (42%) of the investors actively selling fund interests on the secondary market are based in Europe, while 32% are located in North America.
Tactical secondary selling has become a common theme for many private equity investors, allowing them to reduce their exposure to the asset class or re-shape their investment portfolio. For example, in May 2017, Harvard Management Company (HMC) announced its plans to sell $2.5bn worth of private equity and real estate fund interests on the secondary market, using Greenhill Cogent as its intermediary during the process. This follows the appointment of N.P. Narvekar as CEO of HMC at the end of 2016, who announced subsequent changes within the organization; these changes included halving the staff count and a shift towards internally managing the portfolio of several asset classes.
Other notable secondary market activity includes the sale of 26 private equity fund interests by California Public Employees’ Retirement System (CalPERS) between June and December 2016 for $434mn. One key reason why the public pension fund has looked towards the secondary market was its desire to reduce fund administration costs, particularly those associated with rising private equity fees.
As shown in Preqin’s Secondary Market Update for Q2 2017, an equal proportion (41%) of expected sellers on the secondary market in the next 12-24 months are based in North America and Europe. The majority (61%) of these institutions will look to sell their interests in buyout funds, followed by private debt and venture capital (48% and 43% respectively). Notable transactions completed in Q2 include the staple secondary transaction between Mubadala Investment Company (seller) and Ardian (buyer) worth $2.5bn.
With the aggregate unrealized value across buyout, venture capital and growth funds that have 2006 or older vintages standing at $166bn in December 2016, and investors’ increasing need for liquidity within a largely illiquid market, the overall growth within the secondaries market is set to continue.