Research report

Secondaries in first place: A compelling access point in private equity

With North American private equity (PE) AUM nearing $3.5 trillion, secondaries offer a unique entry point to the market.

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February 15, 2024 | 20 minute read

Secondary market investing is deeply familiar to stock market investors with centralized exchanges such as the New York Stock Exchange (NYSE) and Nasdaq matching billions between buyers and sellers on a given day. At a fundamental level, the secondary market for private equity (PE) is not dissimilar in its purpose—a market between sellers seeking liquidity and investors seeking exposure to the market.

However, the secondary market for PE is illiquid and relatively early in its evolution compared to public markets. PE has experienced expansive growth over the last decade as the universe of PE fund managers and investors has increased significantly, pushing North American PE assets under management (AUM) to nearly $3.5 trillion today. A deeper and wider investor base, a dramatic rise in the number of private companies and portfolio construction considerations unique to private market investors have created demand from both general partners (GPs) and limited partners (LPs) for a more efficient and robust secondary market.

For investors, we believe the continued evolution of the secondary market for PE presents opportunities for strong returns, portfolio diversification and more direct exposure to the companies driving economic growth.

Key takeaways

  • Secondaries are a natural evolution of the maturing PE market—where North American AUM is nearly $3.5 trillion.
  • The unique market structure often yields favorable dynamics for investors: Purchase discounts, no blind pool risk and reduced J-curve.
  • Secondaries serve as a differentiated access point to the return drivers of private equity, combining portfolio acquisitions (LP-led secondaries) and single-asset investments (GP-led secondaries).
  • Provides a single-point-of-entry for portfolio diversification across vintages, sectors and GPs.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Alan Flannigan

Alan Flannigan, CIPM, CAIA

Associate, Investment Research