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Why new investor allocations are flowing to secondary funds

Secondaries are now the number two long-term strategic preference of LPs, after mid-market buyouts, but ahead of other more established strategies including growth capital and large buyouts, according to Montana Capital Partners’ 10th Annual Investor Survey.

  • Private equity secondary funds are now more popular for investors than large buyouts
     
  • Single-asset GP-led continuation funds now represent about a quarter of the total secondary market 
     
  • Majority of investors do not expect to be selling positions in the secondary market in the next 12 months

Secondaries are now the number two long-term strategic preference of LPs, after mid-market buyouts, but ahead of other more established strategies including growth capital and large buyouts, according to Montana Capital Partners’ (MCP) 10th Annual Investor Survey.

The surge in popularity, which comes as over half of investors say their overall PE allocations increased during the past year, means that almost three-quarters (73%) of survey respondents have already invested in a secondary fund, while over one quarter (27%) have used the secondary market to LP sell positions. 

While a majority of respondents do not expect to be selling positions in the next 12 months, the 25% of institutional investors and 13% of family offices and foundations that indicated they would do so, still represent a significant amount of AuM and, therefore, an attractive opportunity for potential secondary buyers over the next year.

The proportion of portfolios allocated to secondary funds by both family offices and institutions is also on the increase, with over half of the former and 40% of the latter now making allocations of over 10% – up from 43% and 30% last year.

When it comes to investor preferences in the near term, niche strategies and diversification are top of mind with complex secondaries and fund portfolio acquisitions ranking first (both 30%), followed by multi-asset GP-led transactions and small secondaries (both 25%).

Single-asset GP-led continuation funds have become increasingly important, and now represent about half of the GP-led market, and about a quarter of the total secondary market. The vast majority of respondents (89%) agree that this type of transaction is here to stay, while a quarter of respondents expect the trend to develop into a sub-asset class of its own. 

While single-asset, GP-led transactions are considered by 13% of respondents to be an attractive tool to increase returns, 42% believe that secondary funds should remain diversified and not invest exclusively in such transactions. Some 25% believe secondary GPs should only invest in single asset transactions from a dedicated fund, while 11% consider them just too risky.

Key Takeaway | Secondary funds appear to be a growing strategy for private equity allocations, due to their high level of diversification

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