The secondaries market has grown over 100-fold in the 23 years since Verdun Perry began working in it.
Today, funds focused on secondaries account for about a fifth of PE fundraising, and private equity firms are increasingly turning to secondaries as they seek creative paths to liquidity in the dealmaking downturn. That wasn’t always the case.
Perry entered the secondaries market back in 2000 when Credit Suisse acquired Donaldson, Lufkin & Jenrette, which he had joined earlier in the year. After the acquisition, Perry began working for Credit Suisse’s Strategic Partners. Then in 2013, Blackstone bought Strategic Partners from Credit Suisse.
At the time, Strategic Partners had $9 billion in assets under management. That figure has skyrocketed to $68 billion. And Perry leads the group as global head of Blackstone Strategic Partners.
For its series of Q&As with private equity thought leaders, affiliate title PE Hub spoke to Perry about a range of topics, including why secondaries are so compelling in today’s market. He also provided insights on making the PE industry more inclusive, such as recruiting from historically Black colleges and universities (HBCUs), including Perry’s alma mater, Morehouse College.
What’s your perspective on the deal downturn?
It goes without saying that dealmaking declined in 2022 and 2023. Interest rates have gone up significantly as a result of higher inflation, and while people can speculate on whether the interest rate increases are over or not, one thing is clear. Interest rates are a lot higher than they were in 2021. As a result, debt capital, which is often required for people to get deals done, is a lot more expensive, and it’s less available.
When that happens, acquisition multiples come down, because equity percentage as a percentage of a deal increases. That often puts downward pressure on returns. One of the ways to overcome that is to pay a lower multiple. If you’re a seller and you’re not willing to accept the lower multiple, you hold. As a result, people are holding these assets longer, and that’s why you’re seeing exits and distributions decline significantly. Less exit activity. Less deal activity equates to less distributions.
For us, this presents an opportunity. Sellers that are already over-allocated to private equity are hoping that their over-allocation issue will be resolved as exits occur. But those sales aren’t happening at the pace that they had hoped. So instead, they’re pursuing opportunities on the secondary market to produce cash. For us, that presents more buying opportunities.
How is the secondaries market connected to the primary market?
It’s very connected. The secondary market is a function of the primary market. As primary deals get done, it will impact what we see four, five or six years from now. The deals being done today in the primary market often translate into exits (and distributions) for the secondary market.
The sweet spot for Blackstone Strategic Partners is six to eight years. We’re constantly observing the primary market to get a sense of what buying opportunities will look like.
How has the secondaries market evolved?
The size of the market has grown tremendously over the past 23 years. In 2000, the global secondary market was roughly $1.3 billion in total volume annually. This year, we expect roughly $130 billion in volume.
If you look at the total value in private market funds today, it’s roughly $10.2 trillion. That includes buyout, venture, private real estate funds, private infrastructure funds and private credit. Of that $10.2 trillion, only about 1 percent trades on the secondary market, which we call the turnover rate. That number is tiny. But if we go back 23 years, the turnover rate was one half of 1 percent.
The size of the secondary opportunity has grown significantly, both because primary fundraising for private market funds has grown exponentially, as well as the increasing turnover rate.
The biggest evolution, frankly, is awareness. If you had come to me in 1999 and said tell me about secondaries, I would’ve said, “I’ve never heard of it.” That was true for most people.
Today, I would estimate around 80 percent of the LP community is familiar with secondaries. The fact that more people are aware of the opportunity to exit a long-term illiquid asset class should they need to or want to sell has effectively generated more volume.
What’s driving interest in secondaries?
This year, lots of large, sophisticated institutional investors are over-allocated to private equity. They’re huge supporters of private equity and will continue to be huge supporters, but the public markets pulled back in 2022 primarily driven by rising interest rates. As a result, private assets as a percentage of their overall portfolios increased. It’s called the denominator effect. Think about a total portfolio in which you have private equity, which stayed relatively flat, or even up over the last two years, but public equities came down. By definition, private equity became a larger portion, and in many instances went over many LPs’ target allocations.
If a pension fund, for example, had a 15 percent target allocation to private equity in the past, today they may be sitting at 22 percent. Many organisations can’t just sit at 22 percent, they have to correct for it. One of the ways they correct for it is to sell assets on the secondaries market.
The other reason is that LPs want to generate liquidity. Distributions are relatively low today. If you look at distributions this year versus 2022, they’re down roughly 50 percent. That is on top of 2022, which was down roughly 40 percent versus 2021.
If you need distributions to make new commitments or to free up capacity to make new commitments, the secondary market is clearly a viable way to do that.
Do you expect that growth to continue as we head into 2024?
Absolutely. When you think about the secondary market, one of the biggest misperceptions is that people sell when something’s wrong, or when they’re having a liquidity issue. That’s not true. The vast majority of sellers are selling to actively manage their portfolios.
For example, sellers may choose to sell older funds that are eight to 10 years old. They can sell those older funds to reduce the administrative and monitoring burden within their portfolio. Think about some of the private equity teams at large institutions. There might be four people, but they’re invested in 200 funds. That’s a lot to track and monitor.
Second, if you can sell off the older names, you can take the cash from the sale and redeploy into new investments that can potentially drive meaningful future performance.
I firmly believe the growth will continue. In fact, what we’ve seen is a step function up whenever there’s a disruption in the macro-economic environment. We saw it after 9/11 in the 2001-02 timeframe. We saw it after the 2008-09 financial crisis and we’re seeing it now.
Disruptions can often motivate large investors to evaluate how they can generate liquidity, and oftentimes, even after things improve, they become programmatic sellers.
I would argue that between now and 2030, this market will go from $130 billion in size to over $300 billion. Part of the reason is what I mentioned earlier, the turnover rate is only 1 percent. If the turnover rate were to go to 2-4 percent, there’s massive growth for this market. And that really speaks to the upside potential in terms of growth for the secondary market.
To use a baseball analogy, we’re still in the very early innings. I would argue we’re probably at the top of the second inning. And even if you’re not a baseball fan, you know that’s very early.
In addition to the diversified LP-led secondary market, you have an emerging GP-led secondary market where GPs are choosing to hold on to their best quality assets longer and they’re using what’s called a continuation fund vehicle to allow their limited partners to either elect to continue the journey or to sell to groups like me in a secondaries transaction. That’s coming online and will drive even more volume.
Some observers say that the secondaries market has been successful in attracting talent from groups that are underrepresented. Do you agree?
The answer is yes, absolutely. If you look at when I started working in secondaries 23 years ago, even 15 years ago, the secondary market is attracting a lot more diverse talent, whether it be gender, racial or ethnic diversity.
But it doesn’t stop there. If you look at buyouts, venture, credit, growth, real estate, infrastructure, all those asset classes are attracting more diverse talent. I think the reason is many of the groups that run large-scale and small-scale private equity firms or private market firms have increased their aperture in terms of where they recruit from.
Let’s take Blackstone for instance. In 2015, we recruited from only nine universities. Today, it’s over 80 including multiple HBCUs, one of which I’m a proud graduate of, Morehouse College. What we’ve seen is a pivot or evolution in thinking. When you consider what I and other investors do, we search the entire globe to find the best opportunities for investments. Now, many of us are doing the same thing to find our talent.
Firms are looking at Morehouse College, Howard University, Spelman College, Villanova and Middlebury. This isn’t just about Harvard, Yale, Penn, Columbia and Stanford. Firms are going to schools they have not visited before and are finding new ways to recruit talent. If you are outstanding, and willing to put in the effort, why wouldn’t they bring you on to help build out their talent base?
While there is still work to do, there are fewer barriers to entry for diverse talent looking to enter the private equity industry than there were 10 years ago, and it’s positive for the overall market. This isn’t about giving opportunities to a select group of people. It’s about trying to find the best talent and the best talent comes in all forms.
What advice do you have for PE firms that want to create a more inclusive and diverse workforce?
The first thing is to state your goal and communicate to the entire organisation what you are hoping to achieve.
Second, ask the important questions. Where do we recruit from? Why aren’t we diverse today? Maybe it’s where we’re recruiting, or because we’re going back to the same places, or maybe we’re trying to replicate ourselves in a way that creates some blind spots.
Finally, firms might want to go out and get proximate to where diverse talent is. Increase your funnel and speak to those organisations focused on developing diverse talent or visit HBCUs. There’s an abundance of talent at HBCUs, but that talent may be unfamiliar with your firm or the opportunities within your firm.
You have to increase your aperture and look in places maybe you haven’t looked before to bring on talent you might have otherwise missed.
It doesn’t have to be rocket science. This isn’t about lowering standards. This is not about compromise. This is about going to all places to find the very best talent.