PRIVATE EQUITY IS A LONG-TERM INVESTMENT — until it’s not. For investors who wish to do things like reduce the number of managers in a portfolio or move money into more-mainstream assets, there’s no longer a stigma around shedding private equity holdings. It’s easy to see why some people might seek to escape deals with private equity funds, which typically lock up capital and require annual commitments for a set period. These funds don’t trade publicly, so an informal secondary market has evolved in which investors sell their stakes rather than wait out contracts that can last as long as ten years.

“In the past, investors wanted to be discreet about selling private equity stakes, as they thought it might signal that they were distressed,” says Benoît Verbrugghe, New York–based head of AXA Private Equity for North America, which manages $17 billion in primary and secondary funds of funds. “It’s not taboo anymore.”

   
 AXA Private Equity's Benoît Verbrugghe  
Investors used to sell private equity on the secondary market mainly in response to traumas like the 1987 market meltdown and the savings and loan crisis of the 1980s, says Kevin Albert, a New York–based partner with private equity fund-of-funds group Pantheon Ventures. But as pension funds get more sophisticated about managing their illiquid assets and regulators force changes on global institutions that hold private equity, it has become accepted practice. “Any time an institution gets a new CIO, you’ll see them make changes to their private equity portfolio just like they do their public securities,” says Albert, who ran the global private equity placement group at Merrill Lynch & Co. for 24 years. “That will continue to make secondaries an ongoing and high-volume business.”

Worldwide secondary market activity has increased to some $25 billion a year today from $2 billion in 2001, according to London-based Pantheon, which has $23.9 billion in primary and secondary assets under management in the U.S., Europe and Asia.

The market has attracted investors in secondary private equity funds of funds. Last year U.S. secondary funds grew their assets by 55 percent over 2011, to $10.5 billion, according to news and analysis service Dow Jones Private Equity Analyst. Meanwhile, ten European secondary funds raised a total of $11 billion in 2012, compared with $4 billion the previous year. AXA Private Equity, a subsidiary of French insurer AXA that entered the secondary business in 1999, launched fundraising for its fifth such fund in 2010, aiming to collect about $3.5 billion. When the fund closed last June, it had amassed commitments to invest $7.1 billion.