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Private equity secondary market booming

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Continuation funds up around four-fold in five years

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PE funds try to 'hold on to best assets for longer'

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Discounts are narrowing, eating into returns

By Mathieu Rosemain and Andres Gonzalez

PARIS/LONDON, Jan 17 - The secondary market for private

equity funds saw record transaction volumes last year as buyout

bosses and their investors looked for ways to generate cash amid

a downturn in dealmaking.

Paris-based Ardian said this week it had raised $30 billion

in the biggest-ever secondary fund, a signal the industry is

betting on an even busier time as exit paths for investments

remain tricky and private equity firms look to hold assets for

longer.

Secondary managers buy private equity investments from

investors in the buyout funds, which need their cash back faster

than managers can deliver.

The likes of Ardian also invest in so-called

continuation funds, which buyout firms use to hold assets beyond

the life of the original fund because they want to stick with

high-performing assets or because they are struggling to sell

them profitably. The number of continuation funds has increased

around four-fold in the past five years, according to Bain &

Company.

"There is a mega trend of private equity firms trying to

hold on to their best assets for longer," said Greg Ciesielski

at HarbourVest, one of the biggest secondary managers globally.

Last year saw north of $150 billion in secondary market deal

volumes, according to Imran Hameed, managing director at PJT

Park Hill, beating 2021's previous record of around $130

billion.

Ardian's fundraise - the firm has already spent half of the

cash it has raised - was $7 billion bigger than the previously

largest fund closed in 2023, Preqin data show.

"By 2025, we'll have at least as many sellers bringing

portfolios to sell," said Ardian's Vladimir Colas, Co-Head of

Secondaries & Primaries.

"On the secondary market, we're still undercapitalised, but

we can do transactions. And the other phenomenon is, the

expectations between what sellers want and what buyers can pay

is narrowing."

Overall, secondary fundraising last year reached $56

billion, down from 2023's record $92 billion, according to

Preqin.

Victoria Chernykh, an analyst at Preqin, said Ardian's

record haul, along with two other managers looking to raise

$10-$15 billion funds, signalled a busy year although another

record was unlikely.

While dealmaking activity is increasing, it still lags

historical levels and initial public offering markets remain

difficult.

"Private equity funds have made few distributions in recent

years," said Marion Cossin, who heads the secondary advisory

team at Lazard ( LAZ ) in Paris. "This is prompting some (limited

partners) to sell holdings on the secondary market to generate

liquidity."

Hameed said private equity-led sales were no longer

considered "exotic" or "the fallback option if a regular sale

process has not worked out".

But as cash pours into the secondary market, the discounts

at which managers can buy investments have narrowed, reducing

returns, sources say.

Preqin's Chernykh cited a recent survey showing that

secondaries were no longer investors' top target. She said some

were loath to invest in secondary funds given the fees and

because returns now looked similar to traditional buyouts.

(Writing and additional reporting by Tommy Reggiori Wilkes

Additional reporting by Iain Withers

Editing by Anousha Sakoui and Ros Russell)