With Investors Craving Certainty, GP-Led Secondaries Are Booming

Private equity firms are rolling out products with a handful of companies from previous funds and investors are piling in.

I-Hwa Cheng/Bloomberg

I-Hwa Cheng/Bloomberg

Private equity funds stocked with just a few companies plucked from previous funds are continuing to be popular with investors.

More than one-third of institutional investors expect to invest over $100 million into so-called GP-led secondaries by the end of June, with 7 percent planning to invest $500 million or more, according to the latest survey from Eaton Partners, a Stifel Company, which distributes funds from private markets firms. Twenty percent of survey respondents said they had set aside money specifically to invest in GP-led secondaries, a percentage that Eaton Partners expected “to increase in the near to mid-term.”

During the second half of April, Eaton Partners surveyed 97 global investors across Asia, Europe, and North America, according to Peter Martenson, global head of GP advisory, secondaries, and direct investments.

Secondary stakes in private equity funds have grown from an unloved asset class to one valued at over $100 billion in the past few years. Initially, secondary transactions were mostly initiated by investors that wanted to get out of certain funds before the lock-up period was over. More recently, private equity firms started to sell their best-performing companies to their next funds and formed the GP-led secondaries market (GP refers to the general partner). In 2021, GP-led secondaries – also called continuation funds – accounted for 44 percent of all private equity secondary transactions, according to private equity advisory firm Campbell Lutyens.

GP-led secondaries in technology, healthcare, and industrials are the top three most popular sectors with investors, according to Eaton Partners. Energy, life sciences, and financial services were ranked at the bottom.


Survey respondents didn’t express a preference for funds with just one asset over ones with multiple companies, according to Eaton Partners. But investors have gravitated more toward single-asset deals since the pandemic to get around the complex due diligence of researching several companies. More than a third of respondents preferred to be the sole or lead investor in the secondary funds, while the rest said they wanted to be part of a syndicate.

According to Martenson, these products are good choices for investors because the underlying companies have already proved to be valuable assets in the past fund. “You are backing a winning company with the GP who knows the company well,” he said. “It’s kind of a no-brainer.”

But the aggressive pricing trend has worried some investors in the secondaries market. According to McKinsey’s annual private markets report, private equity secondaries traded at an average of 90 percent of net asset value last year, with buyout transactions priced at an average of 96 percent. The Eaton Partners survey also noted that high NAVs have become the top concern for investors during the underwriting process, followed by mediocre opportunities, and GPs that are not well known.

The targeted internal rate of return of the secondary deals ranges from 15 percent to 20 percent, according to Eaton Partners. Martenson said this is a lower IRR range than what investors expect from a new fund. “Without knowing the company or the manager, most people are looking for a 20 to 25 percent of gross IRR,” to compensate for the added risks, he said.

Still, an IRR of 15 to 20 percent is a high return target, which “highlights the compelling nature of the companies being targeted,” the report said.