McKinsey: Take heed of abuse of secondaries

The market has deepened and matured, and with any new financial product, there is always the potential of abuse, according to partner Bryce Klempner.

The secondaries market is much deeper than it was one decade ago and the proliferation of products and structures will have both upside and downside, according to a senior partner at McKinsey.

“With any new financial product, there is always the potential of abuse, but the net result of these products should be positive for the space,” Boston-based Bryce Klempner told Secondaries Investor.

“The advent of a deeper secondaries market, for instance, should over time add depth, liquidity and stability to the private market landscape,” he added.

Secondaries transaction volumes reached a record $72 billion last year, climbing almost five times 2008’s $15 billion, according to data from Coller Capital. Fundraising for 2019 also seems “unstoppable” with at least five secondaries firms seeking $48 billion among them, McKinsey noted in its Global Private Markets Review 2019 published on Wednesday.

As the secondaries market deepens, however, so will the increase of “innovative but complex and conflict-ridden transaction proposals”, as Oregon Public Employees Retirement Fund noted in a 31 January presentation outlining its 2019 private equity review and plan.

The “aggressive behaviour of some market participants is leading to a breakdown in the LP-GP alignment,” OPERF noted.