By Joel Kranc
Institutional investors’ increasing participation in the secondaries market underscores its growing importance and appeal within the broader financial ecosystem. Beyond diversification and liquidity benefits, the secondaries market offers institutional investors opportunities for efficient capital deployment, risk management, and access to specialized investment expertise.
Lexington Partners, one of the largest manager of secondary acquisition and co-investment funds, estimates secondary industry volume reached a record high of $128 billion in 2021 and exceeded $100 billion in 2022 and 2023. Several factors are driving this growth, according to the firm, including primary fundraising volume, limited partners (LPs) seeking liquidity in the absence of distributions, and general partner (GP)-led transactions.
Five secondary funds of at least $1 billion raised $46.7 billion last year, according to data collected by Pensions & Investments. This includes Blackstone’s $22.2 billion fund that closed a year ago.
And the growth continues. StepStone Group Inc. raised the largest fund dedicated to investing in venture secondaries ever, the firm announced. The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a big step up from the fund’s predecessor, which closed on $2.6 billion, a record size at the time, in 2022. Fund VI was raised from both existing and new LPs and was oversubscribed, according to StepStone.
Another example, and there are many, comes from private markets investment management firm Hamilton Lane announcing the final closing of Hamilton Lane Secondary Fund VI with $5.6 billion in commitments, marking the largest fundraise in the firm’s history.
Fund VI exceeded its original $5 billion target, seeing strong support from a diverse group of new and existing investors, including corporate and public pension funds, Taft-Hartley plans, sovereign wealth funds, endowments, foundations, private wealth platforms and other financial institutions from over 30 countries around the world.
Ryan Cooney is managing director on Hamilton Lane’s Secondary Investments team. “From our vantage point, and being in the middle of this private markets activity, this is a strategy that is increasingly playing a larger role in portfolios. We’ve seen some of the largest, most sophisticated investors out there in the world increase their allocation to secondaries.”
He adds that, in some cases, allocations are coming from the investors’ primary allocation. “We’ve also seen smaller investors that have never invested in the private markets before dip their toe in the water, so to speak, by using secondaries.”
Why?
Often it is about diversification and risk. By investing in the secondaries market, these investors gain access to a broader spectrum of investment opportunities beyond traditional asset classes. Also, the secondaries market allows institutional investors to adjust their exposure to specific sectors, geographies, or types of assets without having to wait for the typical investment cycle of primary markets. This flexibility is particularly valuable in volatile economic environments or when seeking to rebalance portfolios strategically.
One of those risks that are eliminated for the investor is the so-called blind pool risk. Cooney explains, “We have insight into how those private equity funds have been built by the general partner. You’re stepping into these private equity funds that are four or five six seven years old. [However], if you make a commitment to a buyout fund on day one you don’t necessarily know how that fund has been invested or built.”
He further explains that diversification can be achieved through different private equity funds, through different vintage years and strategies. “If you make a commitment to a buyout fund you know that the private equity manager is probably invested in between 15 and 25 companies. Here in the secondary market, a fund could have thousands of underlying companies.”
Finally, secondaries are more mature. Capital gets invested more quickly and comes back more quickly because typically the private equity funds are through the investment period and are in more of the realization phase of the funds lifecycle. Cooney says that at that point some of the companies might be exited, which an investor coming into that, would benefit from and represents an attractive inflection point.
Today, Cooney notes, “there are a more diversified group of secondary transactions in addition to the traditional LP interest sale. You’ve got continuation vehicles, you’ve got more preferred equity type of, more complex structure type of transactions, and so that for buyers, is a positive thing because there are more options available, there are a bigger menu of investment opportunities out there in the market, but that expansion of deal types is all around this view of liquidity.
“At the end of the day, that’s what this market really represents: a liquidity solution for an illiquid asset class. And it’s well on its way of growing into a much more relevant part of the asset class.”
