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MarketScape · 08.07.23

How Imbalance in a Niche Private Equity Market May Spur Opportunity

The difficult public bond and equity markets last year have created an imbalance this year in the private equity secondary market, where private equity holdings are bought and sold.

  • Market Views
  • Portfolio Construction
  • Private equity
  • Alternative Insights
Bob Morgan
Managing Director, 50 South Capital

Key Points

What Is the Private Equity Secondary Market?

Some Private Equity Holders Under Pressure to Sell

Potentially Attractive Discounts for Buyers

The difficult public bond and equity markets last year has created an imbalance this year in the private equity secondary market. We found that a flood of sellers of private equity holdings hasn't been matched with enough buyers. We think this has produced increasingly attractive buying opportunities for private equity investors. Let's take a closer look.


Unlike the primary private equity market, which offers initial investment opportunities in a given asset, the private equity secondary's market is the selling and buying of limited partners' holdings in private equity funds after the initial investment is made. Historically, periods of heightened volatility have generated significant opportunities to purchase seasoned private equity assets at material discounts to their intrinsic values from investors who sell them through the secondary market.


The secondary market has grown from a relatively small subset of private investments in the early 2000s to more than $100 billion in transaction volume in 2022. While the market has grown rapidly over the last two decades with more interest from institutional investors, it remains a niche option in the private equity market.


Even with more interest from institutional investors, there is still a dearth of capital relative to the number of limited partner interests for sale. This supply-demand imbalance is especially acute today. This is due to a flood of sellers coming into the markets as investors holding private equity assets saw losses in their public equity and bond holdings last year with the decline in the market, while private equity valuations remained relatively more stable. We found that this resulted in overallocations to private equity, forcing some of those investors to sell into the secondary market to reduce their allocations.

Main Point

With liquidity in short supply, we think the highest quality funds will be available for buyers at potentially attractive discounts.

While we expect new funds to alleviate the capital shortage over time, competitive barriers to entry are high. We think the most successful secondary strategies will be managed by firms that have long-term relationships in the private equity market and significant underwriting expertise. They also should possess market insight to optimize a transaction's risk-return profile, along with strong relationships with general partners, in order to most efficiently complete the private equity fund purchases.


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