A decline in mergers and acquisitions and exit activity has led private equity limited partners to turn to secondaries as a tool for portfolio management and liquidity.A slowdown in mergers and acquisitions and in exit activity is contributing to the private equity secondary market, a growing option for investors in the alternatives space.
As more companies choose to stay private, there are more opportunities to invest in private market investments such as secondaries, Mr. Vasanji says. In addition to creating liquidity, LPs can use secondary sales to free up cash flow to pursue new investment opportunities, rebalance exposures, and manage risks.
“The secondary market presents a highly attractive opportunity for adding alpha to an investment portfolio, particularly in volatile market environments,” Mr. Vasanji says. More individual investors are looking to invest in private equity, Mr. O’Hara says, but it’s a difficult area for advisors to access. Historically, most of the market for secondaries has been institutional investors, such as pension funds, he says. Now, the demand from individual investors is rising, while institutional investors look for liquidity.
As far as performance goes, vehicles that hold secondary assets have historically provided top-quartile returns, according to the report from Mackenzie and Northleaf, with lower downside risk compared with other private market investment strategies.“These are alternative investments, so at the general level, they can be considered higher risk,” says Steve Balaban, chief investment officer at Mink Capital in Toronto and a lecturer at the University of Waterloo.
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