Secondary Market Opportunity
The growth and maturity of the private equity market has generated significant secondary market opportunities. With the growth of primary commitments made to private equity funds, combined with the increasing understanding and acceptance of secondary market transactions, global annual secondary transaction volume has grown significantly. The growth in the secondary market is being driven by five key factors:
- Commitment growth. The secondary market is highly correlated to both the amount of capital committed to private equity funds and the number of investors in the asset class. The amount of capital committed globally to all private equity funds is over $8 trillion (Preqin).
- Refocus on core operations. Many investors have increased their private equity investment programs, for both strategic and financial reasons. The gains and losses from these partnerships have become a significant part of the earnings volatility of many firms. Therefore, many entities are increasingly scaling back or eliminating their alternative investment programs.
- Active portfolio management. Investors continue to consolidate fund managers, re-balance allocations and actively manage their sub-allocations to various types of private equity positions through secondary market sales.
- Liquidity. Many institutional and high net worth investors, who desire to balance their cash outflows with their inflows, are seeking alternatives to funding additional capital calls. As a result, they turn to the secondary market for liquidity.
- Regulatory change. Capital adequacy guidelines applicable to financial institutions are also contributing to increased selling activity in the secondary market. Such capital requirements are causing many financial institutions to re-evaluate the role of private equity investing, as increased regulations require some financial institutions to set aside significant capital against private equity investments relative to other asset classes. Further, recently proposed legislation may restrict the ability of certain banks and non-bank financial institutions from investing in private equity funds, which may further increase selling in the secondary market by these institutions.