The Evolving Secondary Market

March 31, 2022 | Hayley McCollum, Research Analyst

Combined stacked column and line chart showing private equity secondary market volume and single asset deals within it. Chart visual description: Left y-axis shows Secondary Market Volume in $Billions, ranging from $0 to 180. X-axis shows years from 2012 to 2021 for each column. Right y-axis shows Single Asset % from 0% to 50%. Stacked columns include the Secondary Market Volume data in teal and Single Asset Deals in dark teal. Single Asset Deals as a Percentage of Total Secondary Market Volume is displayed in an orange line overlaid on the columns. Chart data description: From 2012 to 2017, no single asset deals occurred, but have since increased exponentially, with 2018 at $2B, 2019 at $5B, 2020 at $14B, and 2021 at $32B. General secondary market volume has also increased, from $25B in 2012 to $130B in 2021. Single Asset Deals as a percentage of total secondary market volume came in at 25% in 2021. Chart sources: JPM and Preqin.

The private equity secondary market has matured and become more efficient over the last decade, with annual secondary transaction volume scaling from approximately $25 billion in 2012 to roughly $130 billion in 2021. Investors are increasingly turning to the secondary market for liquidity as they look to exit their private equity investments to better manage their overall portfolio allocations. Single asset transactions have been a more recent contributor to the growth of the secondary market, growing from 3% of total secondary transaction volume in 2018 to 25% in 2021, with a large part of this volume driven by the creation of continuation vehicles. These vehicles are quickly gaining in popularity, primarily by managers within the middle and upper end of the private equity market.

Continuation vehicles have become a hotly debated topic within the private equity community. The ability for private equity managers to recapitalize what is often their top portfolio company into a new single fund structure helps raise additional AUM and allows the manager to continue to own the company. However, it can be challenging for Limited Partners (LPs), who often lack the ability to underwrite a single company or are not given enough time to do so. Many institutional LPs are also simply unable to take the concentration risk of investing in a single asset.

As the secondary market evolves, single asset continuation vehicles are expected to become more common. LPs in private equity funds will need to evolve as well to take advantage of these opportunities and remain invested in the best assets over a longer period. This may require LPs to increase their allowable concentration limits, expand underwriting capabilities, or adjust policies in order to roll top investments into continuation funds.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Hayley McCollum
Research Analyst

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