From the Ashes Risen: Private Equity Secondary Funds Take Flight

Abstract

In the midst of the global financial downturn, one area of private equity is growing. The private equity secondary market—i.e., buying and selling existing private investor commitments in private equity and other alternative funds—has been estimated to have grown from about U.S.$4.4 billion in 1997, to about U.S.$63 billion in 2007. The secondary market landscape has evolved significantly in the past two decades. Today, the secondary markets are increasingly viewed as a portfolio optimizing/management tool: sellers view it as a source of liquidity and exit (to an otherwise illiquid investment); and buyers see it as an opportunity to access selective funds or diversify portfolios—often at discounted prices, with a partially identified portfolio well into the investment process, and thus leading to quicker returns. This article discusses reasons for the rapid rise of this market, and salient issues to consider when buying/selling interests in the secondary markets.