Why the secondary market for private equity is experiencing record growth

Long considered a niche segment reserved for a select few specialized investors, it has now become an essential component of the global private equity industry.

This spectacular growth reflects a profound transformation of the private equity industry. The increase in assets under management, the growing liquidity needs of institutional investors, and the development of new transaction structures have gradually made the secondary market a strategic component of the private market.

As private equity continues to gain prominence in the investment portfolios of professional and private investors, understanding how the secondary market works has become essential.

Why is it experiencing such rapid growth? Who is using it? What factors are driving its development? This article examines the key dynamics behind the record growth of the secondary private equity market.

What is the secondary market for private equity?

The secondary market for private equity refers to all transactions that allow an investor to sell a stake in a private equity fund before the fund's scheduled maturity date.

Traditionally, a private equity investment is made with a long-term horizon in mind. Capital is committed for several years to enable the management firms to support the growth, transformation, or succession of the companies in their portfolios. For a long time, this low liquidity was one of the fundamental characteristics of this asset class.

The development of the secondary market has gradually changed this reality. It now allows investors to transfer their holdings to other specialized players without having to wait for the fund to be fully liquidated. This development has significantly increased the flexibility of the private equity ecosystem.

Primary Market and Secondary Market: What Are the Differences?

In the primary market, investors provide capital to a newly established fund. Investments in companies will be made gradually over the following years.

In the secondary market, the assets already exist. Investors acquire an interest in an established portfolio, whose underlying companies have often already demonstrated part of their value creation trajectory.

This distinction is important. In a secondary transaction, investors generally have a clearer picture of the assets held, their maturity, and potential exit opportunities.

Why is the secondary market experiencing unprecedented growth?

The growth of the secondary market is not the result of a cyclical phenomenon. It is primarily the result of several structural trends that are gradually transforming the global private equity industry.

The Maturation of the Private Equity Market

The primary driver of expansion is the spectacular growth of the private equity industry itself. According to Bain & Company, global assets under management in the private markets now total trillions of dollars.

As institutional portfolios grow, the number of holdings automatically increases. Pension funds, insurance companies, sovereign wealth funds, and family offices now manage much larger exposures than they did twenty years ago.

This accumulation of assets naturally creates a greater need for reallocation. The secondary market thus emerges as a tool for optimizing the management of these portfolios, which have become particularly complex.

Liquidity Needs That Have Become Strategic

Growth in the secondary market is also driven by changes in the constraints faced by investors.

In a more volatile economic environment, institutions are seeking greater flexibility. Some want to rebalance their allocations across different asset classes. Others are looking to finance new commitments without increasing their overall exposure to private markets.

The secondary market addresses this very issue. It offers a solution that allows investors to adjust their portfolio allocation without having to wait several years for a fund to liquidate naturally.

This active portfolio management approach explains why the secondary market has gradually shifted from an opportunistic market to a strategic one.

A slowdown in distributions that favors transactions

Since 2022, the private equity industry has been operating in an environment marked by higher interest rates and a slowdown in mergers and acquisitions.

This situation has reduced the volume of outflows from the funds and, consequently, the distributions paid to investors.

Faced with this decline in cash flows, many institutional investors have turned to the secondary market to more effectively manage their exposure to unlisted securities.

This trend has been a major factor in the recent surge in transaction volumes observed in the market.

The rise of GP-led transactions is transforming the industry

One of the most significant developments in recent years has been the rise of so-called “GP-led” transactions.

Historically, secondary transactions were primarily initiated by investors looking to sell their stakes. Today, these transactions are referred to as “LP-led.”

Now, a growing share of the market consists of transactions managed directly by the asset management companies themselves.

These transactions often take the form of follow-on funds. When a Fund manager a company still has significant potential for value creation, he or she may propose transferring it to a new investment vehicle.

Existing investors then have the choice between selling their stake or continuing the journey alongside the Fund manager.

This innovation has profoundly transformed the secondary market. According to several industry studies, GP-led transactions now account for nearly half of global trading volume in some years.

Why are continuation funds appealing to investors?

The success of follow-on funds is based on a simple observation: some companies continue to create value beyond the initially anticipated timeframe.

In the past, fund managers were sometimes forced to sell a high-performing asset simply because the fund was nearing the end of its term.

Follow-on funds now make it possible to extend this time horizon when the operational outlook remains attractive.

This flexibility benefits both investors seeking liquidity and those wishing to maintain their exposure to high-quality assets.

Figures Illustrating the Growth of the Secondary Market

The growth of the secondary market is clearly evident in the key statistics published by industry players.

These figures show that the secondary market is no longer a marginal segment of the private equity industry. It has become an essential infrastructure for improving the market's overall efficiency.

What are the advantages of the secondary market?

Investors' growing interest in the secondary market can also be explained by certain characteristics specific to this strategy.

Greater transparency regarding the underlying assets

One of the main advantages of secondary markets is the amount of information available at the time of investment.

Unlike a primary fund, which has not yet built its portfolio, a secondary investment generally allows for an analysis of the companies already held, their growth trajectory, their profitability, and their competitive positioning.

This additional transparency helps improve understanding of the risks associated with the investment.

Immediate exposure to an existing portfolio

Secondary markets also provide access to companies that have already been selected by experienced management teams.

Investors thus gain immediate exposure to an operational portfolio, without having to wait several years for the capital to be deployed.

This characteristic, in particular, explains the growing interest among institutional investors in this strategy.

Greater Diversification

A secondary transaction can provide access to dozens, or even hundreds, of companies across various sectors and geographic regions.

This diversification is a particularly sought-after feature in the construction of long-term portfolios.

Why are institutional investors increasing their exposure to the secondary market?

Institutional investors' interest in the secondary market has been growing steadily for several years.

This trend can be attributed in particular to the increasing professionalization of the market and the steady improvement in its depth.

Major investors now view the secondary market as a management tool in its own right. It allows them not only to adjust their asset allocations, but also to access certain opportunities that are difficult to obtain on the primary market.

For pension funds and insurance companies, the secondary market thus provides an additional tool for managing long-term liabilities.

Can the secondary market continue to grow?

The outlook remains favorable.

The total volume of assets invested in private equity continues to grow. Liquidity needs remain significant. Follow-on funds continue to expand. Finally, institutional investors continue to allocate increasing resources to this strategy.

These factors suggest that the secondary market could continue to grow in importance in the coming years.

It should be noted, however, that asset quality, market conditions, and valuation levels remain key factors in any secondary transaction.

Conclusion

The secondary market for private equity has emerged as one of the most significant developments in the private equity industry over the past twenty years.

Driven by growth in the private market, the increasing sophistication of investors, and the emergence of new transaction structures, this business now plays a central role in the functioning of the private markets ecosystem.

Beyond the record volumes seen recently, the growth of the secondary market above all illustrates the growing maturity of the private equity industry.

By providing greater flexibility, liquidity, and efficiency to both investors and portfolio managers, it helps make this asset class more accessible and better suited to the demands of modern markets.

FAQ on the Private Equity Secondary Market

What is the secondary market for private equity?

The secondary market for private equity allows an investor to sell or buy a stake in a private equity fund before its maturity. Unlike the primary market, where investors subscribe directly during the fundraising process, the secondary market involves existing stakes that are often invested in portfolio companies.

Why is the secondary market experiencing record growth?

The growth of the secondary market can be attributed to several structural factors: the increase in assets under management in private equity, the growing liquidity needs of institutional investors, and the rise of GP-led transactions, particularly through continuation funds. These developments have significantly increased the volume of transactions in recent years.

Who invests in the secondary market?

The main investors in the secondary market are specialized funds, pension funds, insurance companies, sovereign wealth funds, and certain family offices. These players use the secondary market to manage their asset allocations, gain access to existing portfolios, or capitalize on opportunities in private markets.

What is the difference between the primary market and the secondary market?

The primary market refers to investing in a new private equity fund at the time of its formation. The secondary market, on the other hand, allows investors to acquire a stake already held by another investor. This distinction generally provides greater insight into the underlying companies and their level of maturity.

What is a GP-led transaction?

A GP-led transaction is a deal initiated by the management company of a private equity fund. It generally involves transferring one or more assets to a follow-on fund in order to extend their holding period. Existing investors can then choose to sell their stake or remain invested in the new vehicle.

What are the benefits of the secondary market for investors?

The secondary market provides access to pre-established portfolios, offers greater visibility into the underlying assets, and provides immediate exposure to the portfolio companies. It also helps improve the overall flexibility of private equity investments.

Can individual investors access the secondary market?

Historically reserved for institutional investors,the secondary market is gradually becoming more accessible thanks to the development of investment solutions that allow private investors to gain indirect exposure to this strategy through diversified private equity portfolios.

Can the secondary market continue to grow in the coming years?

Many observers believe that structural trends remain favorable. Growth in private markets, increasing liquidity needs, and the expansion of follow-on funds could continue to support secondary market activity in the long term. However, as with the private equity sector as a whole, its performance will also depend on economic conditions and market valuation levels.