The past two years have been a challenging time for private equity investors thanks to low deal activity, falling distributions and a tough exit environment. As a result, they have turned to the secondary market as a common liquidity management tool.
But it is far from the only reason why interest in secondaries is on the rise. Niklas Risberg, director at Franklin Templeton’s secondary manager Lexington Partners, highlighted the market as a good way for asset owners to adjust their private equity exposure.
“In the past, if you wanted to manage your private equity portfolio, every year 20 to 30 per cent of your NAV would go down [via distributions], so you could manage how much that exposure is through downsizing your commitments going forward,” he told the Top1000funds.com Fiduciary Investors Symposium in Singapore.
“Now, when you’re not getting that yield on the portfolio, people are definitely thinking about how they can use the secondary market to manage their exposure.
“You might want to get out of certain strategies, or your allocation might be too large… it’s more like strategic portfolio management reasons for selling, rather than back-against-the-wall [with liquidity].”
Australia’s second-largest pension fund Australian Retirement Trust (ART) is a seller in the secondary market, and head of investment strategy Andrew Fisher said that position helps with resource management.
The A$320 billion ($201 billion) ART has a little less than 10 per cent allocated to private equity across the fund. It has been overweight private equity since 2021.
“It’s the same reason why we’re selling data centres the same day we’re buying data centres,” he said.
“It’s actually a resource-efficiency thing from our perspective, [because] cleaning up the portfolio on a regular basis allows the team to focus on the things that matter. And running off funds towards the end of their life isn’t something that we really want to be focusing a lot of time and energy on.”
But Fisher stressed that selling in the secondary market doesn’t mean just spinning off all the unwanted assets in a package. For one, the package needs to at least have some desirable assets that will be appealing to another investor. Secondly, timing is crucial. “If we are going to clean up [the portfolio], we have to clean up before, like eight years into a seven-year fund life – you’ll get nothing for that,” he said.
Risberg added that selling in secondary markets can also help asset owners get their capital back sooner.
“If you have a commitment that has already distributed 1.8 times your money, and you have just a little bit of a tail left, you can probably afford to take a pretty big discount on that remaining NAV,” he said.
“You can take those proceeds that you get from the tail and reinvest them at a better return probably than that last little NAV, which you won’t get any upside on and have to wait for two or three years before it comes back.”
Fee pressure
ART is generally a seller but not an buyer in secondaries, which Fisher said is partially because of Australia’s regulatory environment. A regulatory guide (RG) issued by the Australian Securities and Investments Commission concerning disclosure of fees and costs discourage secondaries for funds like ART, Fisher said.
Fisher said private markets already takes up 80 per cent of ART’s fee budget and, while there is an illiquidity premium in private equity, “it is not consistently enough to justify the fees”.
“You need the occasional 2021-like experience where you get a big payoff to actually justify the fees over the long term, and it’s very hard to predict when that lumpy year comes,” he said. “That’s why we treat private equity as a long term commitment in our portfolios”.
And if ART was to invest in secondaries, “you don’t get to apply the discount to [underlying] NAV that it comes in [to the secondary market] at on the fees, unfortunately,” Fisher said. “You get full-freight fees, plus secondary manager fees on top, and that’s just too much of a burden for us.”
With that said, asset owners should evaluate the merits of secondaries based on their own private equity allocation status, said Singapore-based head of Asia Pacific at investment advisor Albourne Partners, Debra Ng. For the under-allocators or new allocators in alternatives, which locally include many Singaporean university endowments, secondaries could be a great entry point.
“One of the easy ways for new allocators to get into private markets and private equity is secondaries, because you get diversification [of assets], you get a nice vintage year diversification as well, and a quick start while you build the rest of your program,” she said.
More broadly, Ng also highlighted the flow of wealth and retail capital into the private equity asset class, which institutional allocators should be cognisant of.
“For all the things that we ask our GPs and the demands on fees, they’re raising a lot of assets from the retail and private channels,” she said.
“The retail channels are less concerned about the elements underlying the valuations and so on. I think if a private bank can provide access [to the asset class] to their clients, they’re winning.
“If you want better governance and transparency as asset allocators or the typical institutional LPs, make sure that those kind of principles are in place.”
This article was edited on 28 March 2025 to clarify the impact of Australian regulatory guidance on ART’s involvement in the secondaries market.
