Here’s How the ‘Small and Inefficient’ Secondary Market Will Grow

Underperformance is no longer the main driver, says Commonfund Capital’s Cari Lodge.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

The secondary private equity market is still “small and inefficient,” according to Commonfund Capital managing director Cari Lodge — and she thinks it has quite a bit of room to grow.

“People need liquidity,” Lodge said during an interview with Institutional Investor on Wednesday, following her appearance on a panel at the SALT conference in New York. “There are not enough funds to buy up all the secondaries. There’s not enough capital. Because of capital constraints, only the funds with the best qualities and risk profiles are being bought.”

Back in 2000, when Lodge started working in secondaries, the total market was worth less than $1 billion. But in 2021 alone, $132 billion in secondary deals were completed — a radical shift in volume over the last two decades.

Although Lodge expects total secondary deal valuation to come down to about $110 billion in 2022 — after all, markets have fallen — she expects the market to regain its stride in 2023. “I would expect the market to be the largest market ever in 2023, as you’re going to see more sellers having volatility in their portfolio,” Lodge said.

She added that over the past 10 years, an average of 3,000 private funds have been raised per year, leaving the secondary market ample room to grow. And there are plenty of reasons that investors participate — most of which aren’t performance-related.


Of course, the denominator effect has been a driving factor for investor activity over the past several months. As public markets have come down significantly, and private market valuation reporting has lagged, private investments now account for a larger portion of allocator portfolios.

“There’s always a lag in terms of valuations in the private markets,” Lodge said. “We’re going to see more sellers.”

Those LPs are often subject to predetermined asset class weights or bands — and must remain in them. If they end up overallocated to the private markets, they’ll turn to secondaries to rebalance their portfolios.

GPs, meanwhile, may use secondary markets to continue holding one or two valuable assets that have reached the end of their ten-year fund cycle, but that they’d still like to hold onto. Called continuation funds, these strategies allow LPs to exit investments or come into a more mature asset.

“Continuation funds [provide] a nice opportunity for the highest-quality access for longer than the ten-year life, which was an arbitrary timeline anyway,” Lodge said.

Investors may also be displeased with earlier vintage funds, especially if they haven’t seen the distributions they had hoped for. That “fatigue,” as Lodge calls it, drives investors to sell.

New investment office leadership — and subsequent strategy shifts — drive LPs to become active in secondaries. “After a certain period, a new CIO owns the portfolio,” Lodge said. “That may lead to selling.”