Investors love a profitable exit. But with faltering global IPO and M&A activity, opportunities for traditional dealmaking have taken a hiatus, and private equity has increasingly turned to secondary markets to fill the gap.
It’s no wonder. The second quarter of this year saw just 241 IPOs globally, the weakest Q2 performance since 2020, according to EY. Global M&A activity likewise declined by nine per cent from the first half of 2024 to the H1 2025, says PwC.
The lack of deals is just one factor fuelling the rise of secondary markets in private equity, where investors purchase assets from other investors instead of from the companies that issued them. While the secondary market once required special relationships and inside knowledge to grab a piece of the action, a more mature secondary marketplace has also provided improved price discovery and greater opportunity for buyers and sellers to meet.
According to Jefferies’ Global Secondary Market Review, global secondary volume soared to US$162 billion in 2024—a 42 per cent increase over 2023. Family offices were involved in about two per cent of those transactions by volume, year-over-year.
“The markets are projecting it’s going to be US$200 billion for 2025,” says Allan Seychuk, vice-president, alternatives at Mackenzie Investments. “Secondaries, especially mid-market secondaries, have generally had very good performance characteristics and really attractive returns on a sustained basis compared to other types of private equity. I think that’s got a lot to do with their attractive structure. You’re closer to a liquidity event, so you’ve got a shorter life in these funds of two to three years until you get cash back, versus seven to 10 years for a typical private equity closed-end fund.”
The two baskets for secondaries
Secondary market deals generally fall into two baskets, explains Ash Lawrence, head of AGF Capital Partners, AGF Management Ltd.’s diversified alternative business.
Between 40 and 45 per cent of transactions are general partner (GP) led, or continuation vehicles, he says. These could be single-asset or a specific portfolio of known assets where the GP is looking for new investors. The other 55 to 60 per cent of transactions are limited partnership (LP) led, where the LP is liquidating out of an asset.
“If you step back in time, GPs were typically identifying assets that had more value creation and additional return opportunity,” Lawrence says. “The fund was reaching the end of its life, so the pitch to new investors was, ‘We need to liquidate, but there is a growth opportunity within this company for a new set of investors.’ In the current market dynamic, we’re seeing that new investors in continuation vehicles have become a little more focused on quality and the best opportunities, because a subset of continuation vehicles are heavier on the need for liquidity and perhaps a little lighter on opportunity for future returns.”
The advantages of investing in secondaries
Typically, new investors, especially on LP-led transactions, receive a liquidity discount and buy into the fund at a lower valuation than the fund’s reported net asset value (NAV). That discount makes the purchase more attractive.
“However, that doesn’t translate to [existing] investors losing,” Lawrence says. “They’re typically selling funds where they’ve done very well. On the other hand, for GP-led transactions, I’ve seen stats where two-thirds of the continuation vehicle transactions occur at or above the market value.”
Seychuk says that secondaries are also attractive because they eliminate “blind pool risk.” Investors know which companies are going to be part of that fund, allowing for better analysis on the full portfolio and facilitating a much more accurate pricing decision when they transact in the secondary market.
Secondaries are sometimes characterized as stale assets that can’t be sold, but Seychuk says this is rarely the case.
“What we’re seeing is that continuation funds are typically very high-quality, so-called trophy assets that the GP doesn’t want to be forced to liquidate in the current environment,” he says. “The family office environment is very familiar with the trend of companies staying private longer, so it’s not a bad thing to provide regular exit opportunities to different groups of investors and shifting from one set of owners to others who may have different objectives, risk tolerances and time horizons.”
However, private equity remains a negotiated market where price depends on what investors bid on assets and how much of the liquidity discount can be beaten back during a deal.
“It all depends on the quality of the underlying assets,” Seychuk says.
Retail interest is helping to drive the secondary market
The increased interest in secondary transactions is also being driven to some extent by retail-focused evergreen funds, which are increasingly significant purchasers of secondary positions, Lawrence says.
“A lot of evergreen funds are relatively new in their life cycle, and buying secondary positions is a really efficient and quick way to get diversification—vintage year diversification, manager diversification, and fund and underlying asset diversification,” he says. “Especially when they’re doing LP-led deals, it also provides a very healthy immediate return from the liquidity discount. But as those funds grow, it becomes a little bit harder to maintain that as a sustainable strategy to drive returns.”
Lawrence also observes that advisors and consultants are reporting that retail evergreen funds are paying between 400 and 500 basis points more than typical investors in secondary positions. That’s driving an increased risk that the demand for retail products is potentially driving some evergreen funds to pay premiums versus the typical secondary market buyer.
Investing in secondaries requires thorough due diligence
LP-led secondaries involving a portfolio of funds offer some inherent protection in terms of manager diversification, fund diversification and diversification of the underlying assets, Lawrence says.
“For a single-asset continuation vehicle, it’s a concentrated risk and due diligence becomes much more important,” he says. “The benefits are that the GP has been invested in this asset for a number of years and understands the asset. However, the existing investors are carrying this asset at a certain mark, and to satisfy existing investors the GP has to attempt to maximize that pricing or at least get par value, versus the market value they have on the books. So, there’s this tension with the GP being somewhat on both sides of the transaction.”
Seychuk adds that although secondaries have evolved to provide greater clarity regarding the characteristics of the asset and its management, uncertainty remains.
“These are private companies that are still ultimately dependent on some sort of exit, and that exit is always uncertain,” he says. “Investors may not get the exit that they’re hoping for.”
What are the risks?
One of the most vocal critics of continuation funds is Egyptian billionaire Nassef Sawiris, who accuses private equity firms of being unable to sell a business and using these vehicles to justify further leveraging.
Rachel Wasserman, a Canadian corporate lawyer and founder and principal at Wasserman Business Law, says she’s also no fan of continuation funds, expressing concern that they may be used as a vehicle to both defer losses and protect income earned from fees. First-time investors—particularly those investing in evergreen funds—may also confuse NAV “squeezing” with real growth in asset value.
“Value is extracted in many different ways, primarily through unproductive leverage,” she says. “LBOs [leveraged buyouts] and other asset-backed loans that subsidize secondary share sales have a negative impact on the economy. This is cash that a company is producing that isn’t being reinvested into the business and is used purely for the benefit of shareholders. Value can also be extracted through dividend recaps and sale-leaseback transactions, where the company is being harvested for resources. This kills a company slowly over time.”
Wasserman is also concerned that returns are based on recycled capital, not underlying performance of the asset. Theoretically, new investors could continually replace old ones for an extended cycle.
“Continuation funds are not Ponzi schemes, but they operate very similarly,” she says. “Money in funds money going out, and the underlying assets are, in my opinion, over-valued. When it’s time to actually exit, the last investors could lose the most.”
The future of secondaries
Is private equity engaging in a temporary infatuation with secondary markets until deal-making resumes in earnest? Lawrence says he doesn’t think so.
“I think investors are just looking for the best execution on monetizing and seeing a return,” he adds. “The more liquidity and transaction options there are in the market, the better, whether that’s M&A, a continuation or an IPO. You want as many options as you can have on the table so that you can maximize value.”
Seychuk agrees. “As private equity grows,” he says, “secondaries will naturally grow and become a more and more popular liquidity tool for participants in the market and continuation vehicles will continue to be a part of that overall trend.”
Peter Kenter is a Toronto-based writer with a deep and abiding interest in how everything in the world works and how it got that way. He’s written about the economy, investing, financial services, cryptocurrency, pharmaceuticals, mining, energy, cannabis, agriculture, consumer electronics, education, sponsorship marketing, and entertainment. He’s the author of TV North: Everything You Wanted to Know About Canadian Television. He loves English bull terriers.
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