Secondaries Not So Secondary Anymore

May 25, 2023 | Hayley McCollum, Associate Research Analyst

Secondary market volume has grown from $37 billion in 2016 to a high of $132 billion in 2021. Despite macroeconomic instability, 2022 was still the second-highest year on record at $108 billion. The secondary market was initially dominated by LPs in need of liquidity, selling at a significant discount. Today, the secondary market is more institutionalized and the reasons for selling on the secondary market have expanded — only 10% of sellers are selling for liquidity reasons, while 64% of deals are done for portfolio management. The increase in GP-led transactions has also added to secondary market volume.

As the secondary market has grown significantly, the space has become increasingly undercapitalized. As shown in the top chart above, the ratio of dry powder to deal volume has steadily declined over the last several years, excluding 2020 when COVID hit deal volume. There is estimated to be only about one year of dry powder available to support the growing supply in the secondary market, well below the ratio in the buyout market. The limited amount of capital relative to secondary market volume has resulted in deals trading at significant discounts, as shown in the lower chart. Buyers can be more selective and have the opportunity to purchase high quality assets at a discount. From here, while there are still challenges given the level of macro uncertainty, there is a clear opportunity for investors active in the secondary market.

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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.