In finance, the private equity secondary market also often called private equity secondaries or secondaries refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Given the absence of established trading markets for these interests, the transfer of interests in private equity funds as well as hedge funds can be more complex and labor-intensive.

Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors, including "pension funds, endowments and wealthy families selling off their private equity funds before the pools have sold off all their assets.

Buyers seek to acquire private equity interests in the secondary market for multiple reasons. For example, the duration of the investment may be much shorter than an investment in the private equity fund initially. Likewise, the buyer may be able to acquire these interests at an attractive price.

Finally, the buyer can evaluate the fund's holdings before deciding to purchase an interest in the fund. Conversely, sellers may seek to sell interest for various reasons, including the need to raise capital, the desire to avoid future capital calls, the need to reduce an over-allocation to the asset class or for regulatory reasons.

The private equity secondary market features dozens of dedicated firms and institutional investors that engage in the purchase and sale of private equity interests.

AlpInvest Partners , Ardian formerly AXA Private Equity , Capital Dynamics , Coller Capital , HarbourVest Partners , Lexington Partners , Pantheon Ventures , Partners Group and Neuberger Berman. Additionally, major investment banking firms including Credit Suisse , Deutsche Bank , Goldman Sachs , JPMorgan Chase , Morgan Stanley have active secondary investment programs.

More and more primary investors, whether private equity funds-of-funds or other institutional investors, also allocate some of their primary program to secondaries. Within the secondary arena, certain smaller specialized firms, including Delta-v Capital, Founders Circle Capital , Industry Ventures, Lake Street Capital, Nova Capital Management, Saints Capital, Sobera Capital, Verdane Capital, Vision Capital , W Capital and Azini Capital, focus on purchasing portfolios of direct investments in operating companies, referred to as secondary directs.

Other niches within the secondary market include purchases of interests in fund-of-funds and secondary funds Montauk Triguard , purchases of interests in real estate funds Landmark Partners, Madison Harbor Capital and Strategic Partners Fund Solutions [8] and smaller transactions Headlands Capital and Auldbrass Partners. As the private equity secondary market matures, non-traditional secondary strategies are emerging.

One such strategy is preferred capital, where both Limited Partners and General Partners can raise additional capital at net asset value whilst preserving ownership of their portfolio and its future upside.

While intermediation in the secondary market is still not as pervasive as in corporate mergers and acquisitions , leading advisors to secondary market sellers include investments banks e. Tullett Prebon Alternative Investments , Cebile Capital LLP [10] and Setter Capital Inc , electronic exchanges e. Since , there have been a growing number of new entrants into the secondary transaction space, hoping to capitalize on what is perceived to be a growing market opportunity.

Other independent advisory firms such as LP Analyst [12] have also sprung up to provide private equity investors with third-party analysis supporting secondary buy-side and sell-side transactions assessments.

A common secondary transaction, this category includes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership or LLC Member ownership interest in the fund s. Nearly all types of private equity funds e.

Secondary market offering - Wikipedia

The transfer of the fund interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund. In addition to traditional cash sales, sales of fund interests are consummated through a number of structured transactions: A secondary buyer purchases an interest in an existing fund from a current investor and makes a new commitment to the new fund being raised by the GP. Since , a limited number of spinout transactions have been completed involving captive teams within financial institutions.

These portfolios historically have originated from either corporate development programs or large financial institutions. Typically, this category can be subdivided as follows:.

These type of secondary transactions have become increasingly explored since mid and throughout as many sellers did not want to take a loss through a straight sale of their portfolio at a steep discount but instead were ready to abandon some of the future upside in exchange for a bridge of the uncalled capital commitments.

The Venture Capital Fund of America today VCFA Group , founded in by Dayton Carr , was likely the first investment firm [18] to begin purchasing private equity interests in existing venture capital, leveraged buyout and mezzanine funds, as well as direct secondary interests in private companies.

Early pioneers in the secondary market include Jeremy Coller , the founder of UK-based Coller Capital , Arnaud Isnard, who worked with Carr at VCFA and would later form ARCIS, a secondary firm based in France [19] as well as Stanley Alfeld, founder of Landmark Partners. In the years immediately following the dot-com crash , many investors sought an early exit from their outstanding commitments to the private equity asset class, particularly venture capital.

The surge in activity in the secondary market, between and , prompted new entrants to the market. It was during this time that the market evolved from what had previously been a relatively small niche into a functioning and important area of the private equity industry.

Prior to , the market was still characterized by limited liquidity and distressed prices with private equity funds trading at significant discounts to fair value.

During these years, the secondary market transitioned from a niche sub-category in which the majority of sellers were distressed to an active market with ample supply of assets and numerous market participants. The continued evolution of the private equity secondary market reflected the maturation and evolution of the larger private equity industry.

The secondary market for private equity interests has entered a new phase in with the onset and acceleration of the credit crunch. Pricing in the market fell steadily throughout as the supply of interests began to greatly outstrip demand and the outlook for leveraged buyout and other private equity investments worsened.

Financial institutions, including Citigroup and ABN AMRO as well as affiliates of AIG and Macquarie were prominent sellers.

With the crash in global markets from in the fall of , more sellers entered the market including publicly traded private equity vehicles , endowments, foundations and pension funds. Many sellers were facing significant overcommittments to their private equity programs and in certain cases significant unfunded commitments to new private equity funds were prompting liquidity concerns.

NYPPEX- Private Equity Secondary Market Liquidity Solutions

In these transactions, sellers were willing to accept major discounts to current valuations typically in reference to the previous quarterly net asset value published by the underlying private equity fund manager as they faced the prospect of further asset write-downs in their existing portfolios or as they had to achieve liquidity under a limited amount of time.

At the same time, the outlook for buyers became more uncertain and a number of prominent secondary players were slow to purchase assets. In certain cases, buyers that had agreed to secondary purchases began to exercise material adverse change MAC clauses in their contracts to walk away from deals that they had agreed to only weeks before. Private equity fund managers published their December valuations with substantial write-downs to reflect the falling value of the underlying companies.

As a result, the discount to Net Asset Value offered by buyers to sellers of such assets was reduced.

However, activity in the secondary market fell dramatically from levels as market participants continued to struggle to agree on price.

Reflecting the gains in the public equity markets since the end of the first quarter, the dynamics in the secondary market continued to evolve. Certain buyers that had been reluctant to invest earlier in the year began to return and non-traditional investors were more active, particularly for unfunded commitments, than they had been in previous years.

Since mid, the secondary market has seen increased levels of activity resulting from improved pricing conditions. Through the middle of , the level of activity has continued to remain at elevated levels as sellers have entered the market with large portfolios, the most attractive funds being transacted at around NAV.

As the European sovereign debt crisis hit the financial markets during summer , the Private equity secondary market subsequently saw a decrease both in supply and demand for portfolios of interests in private equity funds , leading to reduced pricing levels compared to pre-summer However, the volumes on the secondary market were not expected to decrease in compared to , a record year [31] as, in addition to the banks under pressure from the BASEL III regulations, other institutional investors, including pension funds , Insurances and even Sovereign wealth fund continued to utilize the Private equity secondary market to divest assets.

In terms of fundraising, secondary investment firms have been the beneficiaries of the gradually improving private equity fundraising market conditions.

From through , each of the large secondary fund managers have raised successor investments funds, sometimes exceeding their fundraising targets. Although the number of transactions was roughly the same as in , the average deal size increased Indeed, the breadth and number of buyers continues to increase with total volume and activity of small and medium buyers becoming more significant. Large buyers accounted for Also driving the expansion of the secondary market is the number of buyers expanding their scope of interest into areas in which they were previously inactive.

The following is a timeline of some of the most notable secondary transactions and other milestones:. From Wikipedia, the free encyclopedia. Financial market participants Credit unions Insurance companies Investment banks Investment funds Pension funds Prime brokers Trusts Finance Financial market Participants Corporate finance Personal finance Public finance Banks and banking Financial regulation Fund governance v t e.

History of private equity and venture capital. Regulation and Compliance Thomson West, ed. Secondary Markets in Private Equity and the Future of U. Capital Markets , Harvard Law School. All about private equity investing in Secondaries AltAssets , Sector Analysis: Articles from Private Equity Secondaries Ennis Knupp The evolution of private equity secondary activity in the United States: Retrieved 29 April PE Wire Archived at the Wayback Machine.

Private Equity Analyst , February 24, An Opportunity in Adversity". Dow Jones Private Equity Analyst Guide to the Secondary Market Edition. Some Say Market Is Overcapitalized Fund-of-Join The Game. Reuters 'Dealzone' November 20, Financial News , February 5, Calpers, and where private-equity funds go to die.

Wall Street Journal's Deal Journal blog, November 5, Goldman picks up Mellon portfolio". Private Equity Analyst, April p.

Abbey sells private equity portfolio to Coller Capital Archived at the Wayback Machine. The Royal Bank of Scotland: Private equity and venture capital. Buyout Venture Mezzanine Growth Secondaries Equity co-investment.

History of private equity and venture capital Early history of private equity Private equity in the s Private equity in the s Private equity in the s.

Financial sponsor Management buyout Divisional buyout Buy—sell agreement Leveraged recapitalization Dividend recapitalization.

Angel investor Business incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital financing Venture debt Venture round.

Private Equity Resumes

Private equity firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity Business Development Company Venture capital trust Private investment in public equity PIPE Pledge fund. Corporations Institutional investors Pension funds Insurance companies Fund of funds Endowments Foundations Investment banks Merchant banks Commercial banks High-net-worth individuals Family offices Sovereign wealth funds Crowdfunding.

Private equity and venture capital investors Private equity firms Venture capital firms Angel investors Portfolio companies. Retrieved from " https: Private equity Financial economics Private equity secondary market.

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Origins of modern private equity. Leveraged buyout and the venture capital bubble. Dot-com bubble to the credit crunch. Buyout Financial sponsor Management buyout Divisional buyout Buy—sell agreement Leveraged recapitalization Dividend recapitalization.