Secondaries may be the key to democratising private equity

The secondaries market is expanding private equity access to individual investors and defined contribution pension plans.

This report appears as part of affiliate title Private Equity International’s September Secondaries Special on 5 Ways Secondaries is Disrupting Private Equity.

Few developments in the private equity industry have been as game changing as the advent of the secondaries market. While the first secondaries trade is understood to have been conducted in the 1980s, it is only recently that some of the biggest firms in private equity have begun to take the sub-sector seriously.

This year alone there have been at least five acquisitions of secondaries firms that have closed or are in process, including Ares Management’s purchase of private equity and real assets specialist Landmark Partners and insurance giant PGIM’s acquisition of Switzerland-based Montana Capital Partners.

There is a reason private equity’s top brass has its eye on this market: secondaries is disrupting private markets. Continuation funds allow managers to hold on to assets longer while providing liquidity for LPs who want it. The LP secondaries market can help deliver quicker distributions to investors – crucial to unlocking more retail participation in an otherwise illiquid asset class. The introduction of digital platforms that facilitate secondaries trades means a world where an investor trades secondaries on their Robinhood account is not a pipe dream.

Read on to learn how the secondaries market is disrupting private equity and what market participants should be aware of in this rapidly evolving market.


Blackstone president and chief operating officer Jonathan Gray and Ares Management chief executive Michael Arougheti have something in common. They both think the secondaries market is critical to opening up private equity to a wider group of investors.

On an earnings call last year, Gray said secondaries is a “logical area” to start for 401(k) plans. Arougheti went further on Ares’ Q2 earnings call in July: “As you think about the reutilisation of private equity – particularly some of the questions or some of the opportunities that are being talked about to allow for private equity ownership within 401(k) and defined contribution plans – the best way to access that exposure will be through secondaries portfolios.”

Several hurdles have made it difficult for defined contribution plans and retail investors to access private equity, including the need for daily valuations, regulatory obstacles and liquidity.

In June last year, the US Department of Labor issued guidance allowing some Employee Retirement Income Security Act pension plan managers to invest in some private funds. The move was welcomed by firms including Partners Group and Pantheon. Both had campaigned for DC plans to be able to invest in PE and have over the years developed private equity strategies that can accommodate defined contribution plans in markets including the US, UK and Australia. It is no coincidence that both firms have expertise in liquidity – they are among the biggest players in the secondaries market.

Building a base

Market sources say there are at least three ways secondaries can help private equity access a wider investor base, including by providing liquidity, increased diversification and quicker cashflows.

Liquidity is the primary benefit. “Inevitably there needs to be some mechanism for liquidity for retail investors,” says Jeff Keay, managing director at HarbourVest Partners, which partnered with ETF giant Vanguard last year on an annual programme to initially provide pensions, foundations and endowments access to private equity.

Whereas institutional investors are more familiar with private asset classes and their longer time horizons, retail investors typically focus on shorter periods and tend to have a greater tendency to want or need liquidity prior to an investment’s natural liquidity timeframe, says Keay.

“[Secondaries] can go a long way towards mitigating the need to either liquidate assets or use some kind of credit facility to otherwise create liquidity that might not be there organically,”
Jeff Keay, HarbourVest Partners

“[Secondaries] can go a long way towards mitigating the need to either liquidate assets or use some kind of credit facility to otherwise create liquidity that might not be there organically,” he says. Although the secondaries market does not address all of the challenges of creating retail products for private equity, it is one of the more obvious tools to help serve retail investors, he adds.

The routes to liquidity range from a secondary market where ‘mom and pop’ investors can sell their private markets holdings – think platforms such as Seedrs and Crowdcube, which facilitate trading of shares in unlisted companies – to the wider alternatives secondaries market, which makes it easier for defined contribution plans to access private equity. DC plans must have liquidity in their portfolios to allow members to increase or decrease their private equity exposure.

“Once you put those investment decisions in the hands of plan participants and individuals who may not know very much about investing, let alone private market investing, you’re in a different set of constraints,” says Keay. “You need to have a different level of flexibility to accommodate what may be more near-term thinking in terms of what members want to do with their retirement assets.”

Educating retail investors about private markets is one of the biggest hurdles to expanding the asset class to a broader investor base, says Yuri Narciss, head of marketing and human resources at digital wealth platform Moonfare.

“People nowadays are quite knowledgeable about investing into stocks or funds, but very few people are knowledgeable enough to pick and choose what kind of private equity funds they would invest in,” Narciss says. For individual investors who aren’t familiar with or cannot stomach private equity’s J-curve, tying up cash for a decade or longer can be a scary thought.

Moonfare offers investors with as little as €50,000 the ability to commit to brand name PE funds such as EQT, KKR and Silver Lake. A common refrain from these smaller investors is, “I would love to [invest], but what if I get divorced [or] lose my job?”, Narciss says. Helping potential customers understand the secondaries market and the ease at which they can exit fund stakes is one of Moonfare’s main objectives, he adds.

In addition to early liquidity, investing in a portfolio of secondhand fund stakes that mitigates the effects of the J-curve and delivers quicker cashflow can be particularly attractive to retail investors.

“One of the differences between retail investors and institutional investors is the quickness with which they may judge the performance of an investment,” says HarbourVest’s Keay.

For an investment programme that only invests in primary funds, capital is typically committed over a three-year period and it may take years before the portfolio begins to be cashflow positive.

“You’re going beyond the tolerance of a lot of retail investors because you have to get your money into the ground,” Keay says. With a secondaries portfolio, as much as 80 percent of an investor’s money can be invested immediately in secondaries assets, something retail investors typically value more than institutions.

For investment manager Fidelity, secondaries plays an important role in delivering both earlier cashflow and diversification, both of which retail investors value. In March, Fidelity took a step closer toward offering more private equity exposure to its clients by acquiring a minority stake in Moonfare. A secondaries portfolio of existing private equity fund stakes can give another level of potential diversification, can be mature enough to “throw off” more cashflow, and can provide a variety of exposures that offer a different profile to a single-manager primary fund, says Andrew McCaffery, Fidelity’s chief investment officer.

Overall, the liquidity the secondaries market provides the private equity market is key to broadening retail access to the asset class, says Sameer Shamsi, head of secondaries at Houlihan Lokey. “More liquidity in the system, directly or indirectly, should help accelerate growth of retail investors in private equity,” he says.