By Dave DiMatteo, PEF Services LLC

Dave-webBased on a number of market reports, approximately 60 percent of Limited Partners (LPs) acknowledged to buying or selling private equity assets in the secondary market. That’s a far cry from the emergence of the market in the early 80’s.. The first participants were specialty funds created for the sole purpose of investing through secondary transactions. Since that time, secondary transactions have become a much more popular diversification option.  Participants now include non-traditional LPs, who are not just looking for a way out of a fund, or conversely, buying into a fund at a deep discount, hoping for the best. These LPs now see the market as another tool to achieve desired returns.

The success of any secondary market is directly related to the health of its primary market. The first fund dedicated to the secondary market emerged in the early 80’s with $6 million in investor commitments. The timing for this fund was not random, rather, a result of a surge in the primary market for private equity funds that began in the early 80’s. Regulatory changes in the late 70’s enabled cash rich pension plans to divert funds into the private equity fray, sending the market into a period of growth.

Fast forward to the present. The amount of investor commitments raised during 2015 by funds specializing in secondary transactions totaled approximately $20 billion globally. Surprisingly , this was a 26.7% decrease from the commitments raised in 2014. In 2015, the secondary volume reached $40 billion, making it the second most active year on record.

In recent years, conventional LP’s have been participating in the secondary market on a larger scale, and in addition to the specialty funds.   In the past these LPs used the secondary market strictly as a way to liquidate their stake in a fund ;they either needed cash or lost confidence that the fund would generate a meaningful return. On the other side of the transaction, the same LPs bought the interests in the secondary market at steep discounts, attached with buyer’s remorse, knowing that the other LP was eager to sell. In recent years, the stigma of conventional LPs transacting in the secondary market has all but vanished. Participating in secondary transactions has become just another portfolio management tool at the LP’s disposal.  According to research released this year by Boston-based Bain & Co., the number of non-traditional buyers, a group that includes conventional LPs, has doubled since 2013, to 485 in 2015.

Below are a few noteworthy milestones:


  • 1984 – First secondary fund raised with 6 million in investor commitments
  • 1991 – 1997 – Secondary funds raise total of $5.2 billion
  • 2003 – Largest secondary deal completed totaling $1.7 billion
  • 2006 – Annual secondary transactions exceed $10 billion
  • 2011 – Annual Secondary transactions exceed $24 billion
  • 2015 – Annual secondary transactions exceed $37.7 billion