PE secondaries market sees surge in interest

Investments

The private equity secondaries market is seeing a sharp uptick in first-time allocations, according to a leading investment consultant, marking a sea change in fortunes for a once unloved asset class.  

Anna Morrison, Senior Director, Private Equity at London advisor bfinance, told Private Equity Wire that a “fascinating” change has occurred with regard to clients’ first-time deployments into private equity.  

“Ten years ago, clients would have been going with a standard fund of funds product as their first-time allocation – it's safe, it’s de-risked, it’s diversified. Now however, people are starting to view the secondaries market as a legitimate alternative to a standard fund of funds structure.” 

bfinance advises global institutional clients with a combined AUM of USD215 billion. 

Morrison added that the GP community has gone through a real “mind-shift” in the last 15 years regarding the secondaries market. “GPs went from viewing secondaries as a bad thing that LPs are trying to get out of, to seeing this as a normal part of doing business and winding down fund flows – resulting in a big increase in dual flow, the number of market participants and high turnover,” she said.   

According to research from investment bank Jefferies Group, private market secondary sales set a H1 record in 2021, with transactions rising to a total of USD48 billion, eclipsing the previous record high of USD42 billion of secondary volume transactions in 2019. In the first half of 2020, transaction flows totalled USD18 billion, impacted by the drop in deal flow during the early stages of the Covid-19 pandemic. 

Morrison ascribed this increase in interest in the secondaries space to a combination of increasing comfort with the asset class and a general increasing interest in the PE space, as “people are looking for those outsized returns that you can get from private equity compared to other asset classes.” 
 
“The secondaries market has been around for a while, but now people are feeling a lot more comfort with the asset class – it's matured quite a lot, the options and the opportunities in the market have opened up.” 

bfinance is also seeing a drive towards impact investing from its client base. Morrison commented that a lot of big players are building platform offerings and raising impact funds that end up being quite large and oversubscribed, but that smaller impact funds are also building out the lower end of the market. 

bfinance’s recent ESG Asset Owner Survey contained indicators suggesting a growing push toward impact investing among financially-focused, -long-term investors. This includes a more widespread practice of mapping portfolios against the UN Sustainable Development Goals (SDGs), and more investors measuring the carbon emissions of their portfolio. 

Morrison distinguished the drive toward impact investing from ESG considerations, saying that in her mind ESG has broadly been incorporated into how GPs think about private equity investing – it’s become an “expectation” rather than a trend.