Price Recovery in Secondary Market for Private Equity

February 20, 2014 | Nat Kellogg, CFA, President

This week’s chart looks at median secondary market pricing for private equity fund interests. Because private equity is an illiquid asset class, investors that have private equity portfolios and need immediate liquidity must sell their interests in existing private equity funds to other investors. This is called the “secondary market”, which has grown substantially since the credit crisis; over $20 billion of fund interests traded hands in 2013 on the secondary market. The above chart shows that in the immediate aftermath of the credit crisis, during 2009, buyers required a steep discount to net asset values to assume the risks of existing fund interests. At the bottom of the market, during the second quarter of 2009, sellers received just $0.30 on the dollar if they decided to sell their private equity investments. However, as the crisis abated those steep discounts vanished. Pricing was particularly aggressive in 2013 with secondary buyers requiring only a 7–10% discount to net asset value. Given these modest discounts, it appears the opportunities in the private equity secondary market are scarce these days.