In May 2014, Preqin spoke to 60 global private equity investors in order to gauge their opinion of and level of activity in the secondary market. Thirty-three percent of these investors stated that the secondary market is of growing importance within their private equity strategy, with 13% considering it to be of core importance. The responses gathered clearly highlight how the secondary market is becoming increasingly attractive to investors, reinforced by the fact that none of the LPs surveyed plan to decrease their allocation to these opportunities. Specifically, 22% indicated that they are looking to increase their exposure over the coming 12 months while the remaining 78% intend to maintain their current secondary investment levels.
When asked what their motivations are for using the secondary market, mitigating the effects of the J-curve was the most commonly given response by the LPs (36%). A third of survey participants (33%) also told us that they use the market in order to take advantage of the discounted interest values as a percentage of the net asset value of the fund, and a further 31% use the market to gain access to top performing managers that they might not have had access to earlier in the fundraising period of vehicles. As noted in Preqin Special Report: Private Equity Secondary Market, other driving factors highlighted by these investors include the ability to view the underlying portfolio of a fund and being able to diversify portfolios by fund vintages.
Preqin’s Secondary Market Monitor online service currently tracks 544 investors that have an interest in investing on the secondary market. Prudential Finance is the largest of these in terms of total assets, with $1.1tn in assets under management, $3bn of which is currently allocated to private equity. The US-based insurance company has previously participated as a buyer on the secondary market, having acquired both single fund interests and portfolios of funds, and is likely to make new purchases again in the future.
Another of the largest players on the secondary market is Abu Dhabi Investment Authority, which has $627bn in total assets. The sovereign wealth fund has a preference for buying stakes in globally-focused buyout funds with vintages ranging between 2000 and 2006. With a preference for exposure for more mature private equity vehicles, Abu Dhabi Investment Authority’s main motivation for participating on the market is as a means of mitigating the effects of the J-curve.