The Private Equity Secondaries Market During the
Financial Crisis and the “Valuation Gap”

Abstract

The authors analyze the performance of the private equity secondaries market during the recent financial crisis. They show that the effective market liquidity contracted severely in early 2009 to only a fraction of earlier volume. They suggest a behavioral explanation for the puzzling phenomenon of the valuation gap, the widening gulf between seller and buyer valuations, based on framing and loss aversion. They argue that the particular form of illiquidity in the secondaries market can be best understood as the cumulative effect of these behavioral effects and accounting-based elements. The article documents the quick recovery of the secondaries market that showed no signs of more protracted turbulences than the stock market. The available evidence indicates that the liquidity and the relative resilience of the secondaries market are efficient.