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Investors dumped a record amount of private equity stakes in flea markets last year, as a prolonged deal-making drought encouraged pension funds and buyout groups to look for other ways to profit from their investments.
Trading volumes globally have reached $162 billion in the so-called secondary market, where investors in private equity or other private funds sell their shares to new investors in exchange for cash, or fund managers themselves sell company shares to new funds.
The total was a 45 percent increase from the previous year and more than 20 percent higher than the previous peak in 2021, according to an analysis by investment bank Jefferies.
Secondary deals have boomed in recent years as private equity firms have struggled to exit investments through IPOs or sales at sufficiently attractive valuations, resulting in a scarcity of cash distributions to fund backers.
Instead, the fund investors — “limited partners” — turned to secondary markets to try to find buyers for their stakes, while the private equity firms managing the funds — “general partners” — sought alternative routes. to spend their investments.
“Last year’s record secondary volume was driven by persistently low levels of (cash) distributions at a time when many limited partners were keen on liquidity,” said Scott Beckelman, global co-head of secondary advisory at Jefferies.
Both limited partners — often institutions such as pension funds, endowments or sovereign wealth investors — and general partners sold record amounts on the secondary market last year, according to Jefferies.
Limited partners sold $87 billion worth of fund stakes, up 36% from the previous record set in 2021, after a dearth of deals in the first year of the pandemic led to a rush to cash out and rebalance portfolios that had become too weighted toward private equity. .
Investors in funds typically sell their stakes at a discount, but Jefferies said the gap narrowed last year to 6 percentage points below the net asset value of buyout fund stakes, from a 9 percentage point gap the year before.
The increase in price signals confidence that private equity managers will soon be able to sell underlying portfolio companies, Jefferies said, as Wall Street braces for a return to dealmaking under a second Trump administration.
Buyout funds have competed with powerful antitrust regulators in recent years, in both Europe and the United States. However, a changing of the guard in the main competition authorities in the US, EU and UK could serve as a precursor towards a more liberal approach to mergers and acquisitions and help facilitate exits.
Prices for stakes in private credit funds rose more sharply than those in buyout vehicles – from 77 percent of asset value to 91 percent – after the launch of new funds dedicated to buying used stakes in private debt funds.
Real estate prices and project shares remained slightly lower, reaching 72 percent and 75 percent of the value of the underlying assets, respectively.
“You have a lot of core LPs who say, ‘I haven't made a distribution from my venture portfolio in over 24 months now,'” said Todd Miller, who also serves as global co-head of secondary advisory for Jefferies.
Private capital firms have also turned to secondary markets, with general partners selling $75 billion in assets in 2024, 44 percent more than the previous year.
The vast majority of that — $63 billion — came from those managers who sold assets from one of their funds to a newer fund managed by the same firm, a so-called continuation vehicle.
Continuation vehicles have become a popular option for private equity firms to return money to investors in a single fund without having to find a buyer for the entire portfolio company – especially when such a sale does not achieve a favorable valuation for the manager.
Three of the roughly 30 European private equity firm EQT exit events last year involved transferring holdings between EQT funds, a person familiar with the matter told the Financial Times, although all three also brought in outside investors.
