Secondary Private Equity Markets No Longer Appear “Secondary!”

As I continue to hunt for my next major article, I thought I’ll focus on a general topic this time. And the subject that I have chosen to write about is an emerging private equity strategy that’s slowly but steadily gaining popularity.

Secondaries or Secondary private equity investments, in very simple terms, can be described as one private equity firm selling a company to another private equity firm. Another interpretation of this term, according to an article in Wall Street Journal, is a strategy through which investors such as pension funds and endowments sell off their investments in private-equity funds before the pools have sold off all their assets.

The secondary private equity market has been growing steadily, and even though it is in the maturing phase, stats have shown that the market is gaining popularity. Moreover, 2014 was indeed a remarkable year   for secondaries. According to a report by Preqin, $13 billion was raised in capital commitments by the end of June 2014. Figure 1 shows the comparison of annual secondaries fundraising since 2006.

According to an article in Wall Street Journal, secondary advisory firm Cogent Partners predicted that the secondary market could witness above $30 billion worth of transactions by the end of 2014, that is, almost twice the transaction value of 2013 ($15 billion).

Figure 1. (Source: Preqin Special Report June 2014)

 An overvalued stock market, a record amount of un-invested capital ($1.1 trillion) committed to private equity funds, and gaining popularity could imply that 2015 would be no different for this young maturing market. Expect more investors to flock to the secondary market this year resulting in greater aggregate capital raised.