Coller Capital recently analyzed secondary market figures for the first half of the year and we believe 2024 is set to be a record year for this segment of the private markets.
The first half of 2024 has proven to be a remarkable and particularly active period for our industry, with some $70 billion1 of secondary market transactions, a new record for the asset class.
How does the volume for the first half of 2024 compare to recent years?
The $70 billion in transaction volume for the first half of 2024 compares to $40 billion for the first half of 2023. This figure demonstrates a very strong recovery and allows us to envisage a transaction volume of $140 billion. by the end of the year. Considering that for many years the trading volume has actually been greater at the end of the year, there is a real possibility of exceeding this $140 billion. This amount should be considered in the context of a decline in volumes observed in 2022 and 2023: after the highs reached by the market in 2021, this rapid recovery demonstrates the resilience of the secondary market.
What are the reasons for this recovery?
The first thing to note is a decline in distributions paid to Limited Partners (LPs), due to a decline in underlying M&A and a slowdown in capital markets activity. In this context, the secondary market is a very interesting way to compensate for the lack of liquidity and distributions.
The second major factor is over-allocation in private equity. This is an issue that LPs have faced for many years, and many have been able to accommodate this over-allocation or have been able to obtain waivers and amendments allowing them to manage over-allocation in private equity. But many investors have also decided that something really needs to be done about this recurring problem. This should be a real driver of volumes for the rest of the year, through 2025 and beyond.
The final point to emphasize is that the secondary market is a valuable tool to adjust allocations over time, regardless of over-allocation and liquidity issues, i.e. to adapt the allocation per manager, per area geographical, by strategy. Thus, proactive portfolio management is expected to be a steady driver of volume over the coming decades.
Another interesting factor relating to the constant growth of the secondary market is the number of first-time sellers. These are LPs selling their stakes in private equity funds on the secondary market for the first time. According to Jefferies, 45% of transactions completed in the first half of 2024 involve a first-time seller, compared to 39% in the first half of 2023. This dynamic creates a pipeline of secondary transactions, because once LPs have had a positive first experience, this increases the likelihood that they resort to the secondary market again in a year or two.
Is the market sufficiently capitalized to support the upsurge in transactions we are seeing?
The increase in the number of transactions completed in the first half of the year compared to the last two years raises the question of whether there is enough capital in the market to support these transactions. According to Preqin, around a hundred billion dollars were raised last year in secondary funds. The General Partners (GP), or managers, will therefore necessarily have to invest this money.
However, at Coller we believe the market is undercapitalized and there are still attractive deals coming to market.
Price dynamics in the first half of 2024
Another factor enabling more transactions in the first half of 2024 is the narrowing of the spread between the buying and selling price. More attractive pricing for LPs should encourage them to sell assets they may have held for some time. This price development is an essential factor in fueling market growth.
Perspectives 2025
There are many reasons to expect 2025 to be a banner year, even with increased distributions, which could reduce the number of trades driven by an urgent need for liquidity. Over-allocation to private equity remains, in our view, a real driver of long-term volumes, and this is something that takes some time to resolve. Growing awareness of the secondary market and its ability to enable proactive portfolio customization will significantly drive volume in the future. These two themes, over-allotment and growing secondary market recognition, will provide tremendous catalysts for 2025 and beyond.
These are fascinating and dynamic times for the secondary funds market, especially as the market continues to set new records and develop new strategies. You could say there’s never been a better time for secondaries.
There is a widespread need for liquidity, an abundance of assets in the market, and prices are advantageous for both buyers and sellers. All of these elements combine to create a particularly favorable environment for our asset class.
1All data and statistics come from Coller Capital and are based on market consensus as of August 2024. Consensus is drawn from reports from Greenhill, Campbell Lutyens, Evercore, Jefferies, Lazard and Setter Capital.
