When affiliate title Private Equity International published its first issue in December 2001, the trading of second-hand interests in private equity funds was still in its infancy. Annual deal volume figures – tricky to obtain from that time – show that secondaries market volume hit $8 billion for the first time in 2005, suggesting that the figure for 2001 was likely in the single-billion dollars.

Fast forward 21 years and secondaries was a market worth around $134 billion in 2021, according to data from investment bank Greenhill. It’s also a very different one to that of 2001, when LP portfolio sales – where an institutional investor sells its stake in a limited partnership to a replacement LP – were the dominant transaction type. Today, these types of deals represent roughly half the market, with the other half comprising so-called GP-led transactions in which sponsors sell assets they own into continuation funds that they go on to manage.

For all its growth, the secondaries market is still in its early innings, according to Verdun Perry, global head of Blackstone’s Strategic Partners secondaries unit, speaking at an industry conference in September. “I would argue we’re still in the very early days of growth – not just in private equity but the secondary market.”

In some ways, the secondaries market’s growth has been a rod for its own back. Regulators such as the US Securities and Exchange Commission have cast a spotlight on some sections of this niche to ensure that investors in private markets are not taken advantage of. At the time of writing, the SEC was seeking public comment on a raft of proposals that include major restrictions and requirements on how some secondaries processes are run.

Origins and growth

The first ever secondaries trade is widely believed to have occurred in 1979 by venture capitalist Dayton Carr. Carr was connected to IBM chief executive Thomas Watson from their days at Brown University and its sailing club. When Watson was selected by US President Jimmy Carter to become ambassador to the USSR in 1979 and needed to dispose of his personal holdings in some VC funds, Carr rounded up the money to buy Watson’s positions.

“It is widely accepted as the first time a limited partnership interest in a private equity fund had been purchased and transferred,” Drew Reilly, a managing director at Venture Capital Fund of America, told Secondaries Investor in 2020. VCFA – the world’s first secondaries fund – was founded by Carr in 1982. 

Over the following two decades, secondaries could hardly be called a ‘market’, with but a handful of firms engaging in buying up investors’ positions in limited partnerships. In 1988, the few secondaries firms that did exist had funds smaller than $50 million in size, according to research by Coller Capital, a pioneer of the industry.


Secondaries deal volume in 2021
Source: Greenhill

By 1990, Chicago-headquartered Adams Street Partners had raised the largest pool of dedicated capital for secondaries, wielding £111 million. It would take another decade for deal sizes to reach significant levels. In 2000, the year prior to PEI’s debut issue, Coller executed the first $1 billion-plus transaction, acquiring UK bank NatWest’s private equity portfolio following the bank’s takeover by Royal Bank of Scotland.

Two key events around the end of the first decade of the 2000s helped catalyse the secondaries market’s growth to the levels it finds itself at today. The first was the global financial crisis, which initially led to a drop in deal volume as many buyers and potential sellers found themselves unable to agree on pricing. 

The second was regulatory responses in the aftermath of the GFC, aimed at preventing the kind of systemic risk that almost brought down many global economies. 

The Volcker Rule, Basel III and Solvency II aimed to limit the proportion of riskier assets that financial institutions could hold on their balance sheets. Secondaries dealflow related to these regulations took a while to materialise, and when it did, proved a boon for buyers of second-hand LP stakes.

A new asset class 

Investment firms and asset managers looking to capitalise on a growing sub-asset class have enjoyed being able to mirror the market’s growth. At the start of the GFC, funds focusing on secondaries raised just $8.9 billion, per PEI data; in 2020 the strategy raised $98.8 billion, a record high. Last year, secondaries funds had their second-highest year ever with $69.9 billion raised – a sign that LP appetite for the strategy remains healthy.

Indeed, LPs say they are keen on backing secondaries funds. According to PEI’s latest LP Perspectives Study, published in December 2022, 56 percent of LPs plan to commit to private equity secondaries funds over the next 12 months – exceeding the previous high of 53 percent recorded in the 2019 study. 

Most LPs have now decided they want secondaries to be a part of their portfolios as they seek out further diversification in their private markets playbooks, says Sunaina Sinha Haldea, global head of private capital advisory at Raymond James: “There’s so much stratification now and so much choice for institutional LPs… that’s the big shift.”

GPs sell assets to themselves

One growth area of the secondaries market that has received much attention in recent years is the rise of so-called ‘GP-led secondaries’. 

In these transactions, a sponsor arranges an optional liquidity process for LPs in one of its funds, with the idea of moving one or more assets out of the fund and into a separate ‘continuation vehicle’ that the sponsor will continue to manage. When managed well, such processes can provide liquidity options to LPs wishing to cash out; give LPs wanting to remain exposed to a set of assets the ability to do so or even increase their exposure; allow secondary capital to come in and gain exposure to often high-quality assets; and give the GP more time and capital to create further value for the set of assets.

When managed poorly, such deals can highlight inherent conflicts of interest between the GP, its LPs and the incoming secondaries buyers, particularly when it comes to the pricing of the deal and the terms of the new fund set up to acquire the assets.

It’s unclear when the first GP-led secondaries transaction was consummated. At VCFA, Carr is understood to have worked on at least one of these types of deals prior to the turn of the millennium. There were several landmark deals in the early 2010s, such as one run by Willis Stein & Company in 2012 and by Motion Equity Partners in 2014. 

It wasn’t until 2018, however, that PE sponsors truly began to cotton on to the idea that, by instigating and running these sales processes themselves, they could both provide liquidity offerings to their LPs, as well as use the processes to their own advantage. Blue-chip managers, spurred by Nordic Capital’s landmark continuation vehicle process that year, realised that continuation funds were not just for troubled GPs or assets, and that if done right, could be a viable way to continue to manage assets. 

The GP-led segment is now the fastest growing and most closely watched area of the secondaries market. Such deals were worth around $63 billion last year, per figures from Lazard. As GP-led secondaries processes continue to proliferate, ensuring these processes are run correctly – and are fair to both the original LPs and those who wish to ‘roll over’ their exposure – will be key to their survival.