What Does Private Equity Secondary Market Mean?
The private equity secondary market is where previously issued equity from a firm is bought or sold and new investor commitments are made.
Private equity investments are typically very illiquid and, therefore, it is often difficult to buy and sell positions in private equity investments. However, the demand for access to these investments has been increasing so the private equity secondary market has been developing since the 1980s in order to meet this demand.
Divestopedia Explains Private Equity Secondary Market
The private equity secondary market and secondary transactions, or 'secondaries', are driven by what is referred to as the 'denominator effect.' In this scenario, investors are forced to leave their private equity holdings, which have not yet matured. Sellers of secondaries may choose to sell interest if they need to raise capital. Other selling reasons may include avoidance of future capital calls or the need to reduce over-allocation. The sale of limited partnership interests is the most common secondary transaction.
There are multiple reasons why buyers seek to acquire private equity interests in a secondary market. Private equity fund investments tend to be longer in duration than in secondary markets, thus the buyer could acquire such interests at a very good price. In a secondary market, the buyer is able to first evaluate the holdings of the fund before going ahead with the purchase of an interest in the fund.
Secondaries are lower-risk in comparison to classic fundraising where the investor is committing to something which has no track record and holds no assets. There is no trading market for secondaries. These trades also tend to be more complex and labor intensive. However, many investors feel the secondary market is vital to their private equity portfolios.