The secondaries market has experienced remarkable growth in 2024, driven by enhanced liquidity, valuation recovery, and increasing interest from a diverse range of investors. In this Q&A, Derek Li from JD Paramount shares insights into key trends shaping the market, including the rise of GP-led transactions, the impact of technology, and the challenges investors face.
Q: How would you describe the current state of the secondaries market?
With enhanced liquidity and valuation recovery in the first half of this year, the secondary market has gained significant momentum so far. $68 billion in transactions in the first half of 2024, and it’s expected to reach $140 billion by the year-end.
Factors such as cash-strapped LPs increased GP-led deals, and growing interest from new investors all play a vital role in shaping the current market climate. Not surprisingly, public and corporate pensions have been the most active sellers due to their portfolio management allocation perimeters.
In addition, the private market secondary space continues to transform significantly as well. Now, technology-driven platforms are playing a crucial role, with digital marketplaces improving the efficiency of matching buyers and sellers through online platforms. Advanced data analytics are providing deeper insight into asset valuations and risk profiles. More and more GPs are employing AI to optimize pricing, sourcing, and management of LP portfolios.
Global expansion is another key trend, with increased exploration of emerging market secondaries and more complex cross-border transactions.
Last but not the least, the investor base for secondary market is also broadening. Institutional investors are becoming more involved, while family offices are tapping into the growing wealth for secondary investments.
Q: How are LPs responding to the increase in GP-led transactions?
With GP-led deals, we have options now in terms of our liquidity need, duration, cash flow objectives, and additional value creation. We like these opportunities.
However, as GP-led secondary transactions are highly tailor-made, the facts and circumstances of each fund and its portfolio are quite different. So, the restructuring plans give rise to a material conflict of interest concerns and require the fund manager to provide transparency to LPs.
Q: What are LPs looking for in the current secondaries market?
We look for increased liquidity needs, broader diversification beyond traditional assets, improved risk management, and advancement in technology that enhances transaction efficiency and transparency. Secondary transactions continue to be a valuable portfolio management tool regarding portfolio liquidity, duration, and characteristics of risks.
The secondaries market gives us immediate diversification since we have access to thousands of underlying portfolio companies across a range of vintage years, geographies, industries, etc.
With that said, we are particularly interested in secondary private credit, and specialized investment strategies such as distressed secondaries that involve investing in assets facing financial difficulties, etc.
Q: What are the biggest challenges currently facing the secondaries market?
As deal supply continues to outpace available capital, so, in addition to financial undercapitalization, the growth of the GP-led secondary market has certainly outpaced the investment-talent pool. New entrants to the GP-led market often need to hire staff from outside the secondary market, and they can take years to train. In secondaries market, the opportunity is not in short supply, it’s a shortage of capital and talent resources.
Also, the structures of secondaries transactions are getting increasingly complex due to being highly bespoke, it makes evaluating the impact of an election for LPs to buy, sell, or hold challenging. These transactions can also present conflicts of interest, particularly where the benefits are believed to accrue chiefly to parties other than the current Limited Partners. As a result, we believe secondary investors with limited due diligence capabilities will invest with caution.
Further, GPs and LPs both need to have structuring and execution expertise to safeguard the alignment of interests. GP-led transactions usually require deep experience in negotiating complex governance, alignment, and fee arrangements among parties with potentially conflicting interests. While the stigma associated with such deals has diminished, their increasing prevalence raises questions for many LPs. Such transactions require the Limited Partner’s full attention, but the timing of the process is often difficult to predict and is therefore potentially disruptive for LPs, particularly when multiple deals overlap.
The long-term success of secondaries market depends on the quality of GP's transparency and the level of LP's engagement.
Derek will join us at the Secondaries Investing Summit on November 20th in New York for a panel discussion on "How LPs Can Leverage Secondaries For Liquidity, Diversification, Risk Mitigation & Pricing Benefits". This discussion will explore Understanding LPs’ key motivations for using the secondaries market and where they are seeing the biggest opportunities, Portfolio construction - knowing how to mix and match GP-leds and LP-leds to optimize your portfolio, How LP exposure to the secondaries space will develop in 2024 and beyond, and How LPs are mitigating regulatory changes and conducting due diligence around their secondaries deals. This discussion will be joined by Jim Pittman (British Columbia Investment Management Corporation) and Niraj Agarwal (New Jersey Division of Investment). Join us.