Understanding private equity secondary investments

Frewen Lam speaks to the fundamentals of private equity secondaries, including the key drivers for investors to buy and sell secondaries.

What are private equity secondary investments?

Frewen Lam: So for private equity or private capital, secondaries can be defined in three categories. The first is the acquisition of pre-existing limited partner or unit holder interests in a private equity fund. The second would be a direct secondary, which involves the purchase of shares in a private company. The third, which is becoming more common, involving GP led opportunities, where the motivation is for the GP to sell into a new continuation vehicle.

Why do people buy and sell private equity secondaries?

Frewen Lam: So the reasons why people will buy and sell have changed over time, but broadly speaking, there's liquidity management, portfolio management as the two key drivers, as well as some other soft factors such as changes in personnel.

So private capital as an asset class clearly is illiquid, meaning that when you do make an investment, it could be many years, 5, 10, 15 years before you fully realize your investment.

And naturally people change their minds during these long durations. So we do see those three factors that I talked about being drivers behind why people sell.

More recently, portfolio management has probably been the main driver. It used to be that selling and secondary market was more of a taboo, this was 15 or 20 years ago. But as of today, it's become a normal way for people to manage their private equity exposures.

What are some reasons for considering an investment in secondaries?

Frewen Lam: So the secondary market has grown, and because people are using this tool as a way to generate liquidity, you have the sellers on the one hand, they think about it in terms of changing, redeploying capital and releasing capital from their private market portfolios. So in the current environment with interest rates going up, the demand for liquidity and shorter duration increasing we are expecting to see more and more secondary deal flow come out from sellers.

For buyers, it's an opportunity to buy into opportunities that are potentially closer to liquidity and potentially to buy into assets at a discount to where they're being marked in the private markets.

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