White paper
Philip Meschke, Moonfare’s Head of Investments, believes there’s plenty of room for secondaries to grow beyond their current 1.2% share of the total private market value.¹
Secondary players in private markets have had the busiest year on record in 2024,² with both LPs and GPs actively seeking liquidity in an exit-constrained environment.
With traditional channels anticipated to bounce back this year, however, could secondaries lose some of their appeal? “Unlikely,” says Philip Meschke, Moonfare’s Director and Head of Investments. In his view, the distribution drought³ of the past few years has solidified these investments as an effective tool for managing liquidity and optimising portfolios.
What lies ahead for secondaries in terms of pricing, asset quality and returns? We spoke with Meschke to find out.
That’s right — 2024 has been exceptionally active for secondaries, with $152 billion in deals closed, according to Lazard. It marked the busiest year on record for these transactions.
This matches what we’re seeing in terms of deal flow and what we are hearing from industry participants and peers. We think this momentum is likely to continue.
Correct, the broader macro challenges and ongoing sluggishness in the M&A and IPO markets have pushed both sponsors and Limited Partners to turn to the secondary market for liquidity and portfolio management solutions. Investors have clearly started prioritising distributions over merely seeing 'paper gains', a shift we’ve often highlighted in our reports. This uncertainty around liquidity and slower distributions continues to drive LP- and GP-led secondary activity and deal volumes.
As secondary investors, we’ve had to factor these macro headwinds into our underwriting. Secondary investors have become more selective, resulting in an overall improvement in deal quality over the past 12–24 months.
We have seen GP-led pricing to continue to remain elevated, but the quality of deals has increased. There are more ‘trophy asset’ deals coming to market. In my view, two main factors are driving this.
First are the macro challenges and the uncertainty that I’ve already discussed. Second is the supply-demand imbalance. Despite strong fundraising for secondaries in recent years, dedicated capital for GP-leds will likely not keep up with the continued growth and adoption of GP-leds.
Even with the rise of new dedicated GP-led funds, we expect this imbalance to persist in the near term. As a result, investors are focusing on higher-quality assets in more resilient sectors, managed by teams with strong track records.
We’ve actually seen growth in middle-market opportunities, resulting in a general decline in the size of continuation vehicles. We think this trend is driven by secondary investors seeking more exposure to the middle-market and middle-market fund managers aiming to provide liquidity to their investors while retaining high-conviction trophy assets.
However, despite the overall reduction in GP-led deal sizes, there has also been an uptick in activity at the higher end of the market. This includes continuation vehicles of $1 billion or more such as KSL's $3 billion-plus continuation fund for Alterra Mountain Company and Abry Partners' $1.6 billion GP-led credit secondaries deal.
Both LP- and GP-led buyout transactions continue to see strong pricing, driven by investor focus on higher-quality opportunities and supported by robust performance in public markets.
On the LP-led side of the market, there’s an ongoing focus on high quality funds, with investors favouring North American buyout managers, where discounts have narrowed.
In the GP-led space, pricing for single-assets has been trending upward as secondary investors concentrate on trophy assets in attractive sectors managed by strong sponsors. We are still seeing modest discounts for multi-asset continuation vehicles.
We’ve also noticed a sharp rise in the use of structures like deferred payments across both transaction types to help bridge pricing gaps between secondary buyers and sellers.
Other asset classes, however, might be experiencing a different dynamic. Discounts for growth, venture, credit or infrastructure secondary transactions tend to be higher compared to the buyout space, with fewer investors competing for these assets.
Unlikely. We believe the 'DPI drought' over the past few years has solidified secondaries as an effective tool for both GPs and LPs.
LPs, in particular, have come to view secondaries not just as a liquidity solution but also as an effective portfolio management tool for managing vintage, strategy, manager, sector and geographic exposures.
Meanwhile, GPs have embraced GP-led deals as a way to hold on to the upside of trophy assets — an upside that would have been "lost" in a traditional exit to another sponsor or strategic buyer. We don’t see this trend slowing down anytime soon either.
The industry remains undercapitalized — despite the significant growth of the secondary market over the past two decades. For example, the capital overhang in 2024 has dropped to 1.8x which is the lowest level in recent years, according to Jefferies. As a result, we believe the opportunity set will remain substantial, providing significant potential to sustain strong returns.
There are a couple of things.
Unlike traditional closed-ended private equity funds, which often experience a J-curve effect, secondaries typically involve mature funds or portfolios that may already generate cash flows. This makes them shorter-duration investments, aligning well with an open-ended structure where investors buy in at NAV and redeem over time. The ongoing distributions provide liquidity that can be reinvested to improve capital efficiency (liquidity is not guaranteed, however).
Secondaries can also offer immediate diversification across managers, strategies, sectors, geographies and vintage years, which is particularly beneficial during the ramp-up phase of an open-ended vehicle.
Finally, because secondary investments typically involve mature funds or portfolios, investors usually have more visibility into the underlying assets. This reduces the ‘blind pool’ risk often found in closed-ended structures.
Our research details the forces and trends shaping secondaries.
Our research details the forces and trends shaping secondaries.
Our research details the forces and trends shaping secondaries.
Absolutely. Secondaries can provide a good entry point to private markets, especially because of their ability for immediate diversification and a shorter distribution profile for investors. That said, it still comes down to picking the right manager which is the key to making the most of these opportunities.
While secondary investing involves assessing fund managers, it rarely provides opportunities for direct engagement, unlike primary due diligence.
That said, we’re able to take advantage of our extensive primary platform and strong manager relationships for access, information and insights when evaluating funds, underlying assets and portfolios in the secondary space.
Unlike ‘traditional’ private equity investing, secondaries typically involve acquiring stakes in mature funds, which often provides greater visibility into underlying assets. This means our team spends considerable time on company-level analyses. We also assess portfolio factors such as cash flow profiles and concentration risk and structural elements like deferred payments.
When it comes to GP-led transactions we prioritize alignment in addition to sponsor and company-level analysis. This alignment ensures sponsors have ‘skin in the game,’ with substantial team commitments that reflect their confidence in the trophy assets.
We see huge growth potential for secondaries and expect volumes to keep rising in the coming years. Since 2010, secondary volumes have grown about sixfold, but they still represent only 1.2% of the total unrealized value in private capital markets.
At the same time, we believe that secondary supply hasn’t kept pace with the growing demand for liquidity from LPs and GPs, who continue to face challenges in a muted exit environment. Exit volumes are down by nearly two-thirds since their peak in 2021, leaving an enormous (and ageing) backlog of over 28,000 unsold companies valued at $3.2 trillion.
Secondaries are also poised to benefit from the overall growth in private markets. For instance, Blackrock, projects private markets to expand from $13 trillion in 2024 to at least $20 trillion by 2030. As private markets grow, we expect secondaries to grow right alongside them, driven not only by this expansion but also by their growing acceptance among LPs and GPs as a valuable portfolio management tool.
On the demand side, we’re seeing new players continue to enter the space, like 40 Act funds and fund managers launching dedicated GP-led strategies.
So yes, we think secondaries will keep growing faster than the overall private markets and will likely move beyond their current share of total private assets.
Note* Semi liquidity in this context refers to the option of redeeming up to 5% NAV on a quarterly basis. Redemptions are not guaranteed, may not be eligible to all investors and are subject to demand and to general partner approval.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.
Benefit from what institutional investors already know: the greatest shareholder value comes from private markets, and funds like those offered on Moonfare have generated an average IRR of 19% — outperforming the S&P 500 by 13%.*
Sign up now%20(1).jpg)
* Past performance is no guarantee of future returns.
Please read this important information. By selecting I AGREE this indicates that you have read and understand the below, before accessing the rest of this website.
This disclaimer is intended for UK readers accessing this website who should be aware that Moonfare cannot guarantee all information displayed on its website will be relevant or suitable for UK audiences. Moonfare cannot guarantee the information contained on its website is up to date, and makes best efforts to ensure it sources and data are accurate at the time of publishing.
The information on this website may not be suitable for all investors and we therefore need to ensure that you are sufficiently aware of the risks and are of a suitable category as defined by the Financial Services and Markets Act 2000.
The information set out in this website does not constitute or form part of any offer to issue or sell, or any solicitation of an offer to subscribe or purchase any investment, nor shall it or the fact of its distribution form the basis of, or be relied on in connection with any contract.
