Investors Expected to Sell Stakes in Private Markets Funds at Record Pace

Private equity secondary managers that have strong relationships with investors will benefit in the competitive market, according to Lazard.

Victor J. Blue/Bloomberg

Victor J. Blue/Bloomberg

With everybody worried about a cash crunch, the private equity secondaries market is expected to hit a new record.

Investors are expected to sell stakes in private equity funds worth $153 billion in 2023, according to the latest PE secondaries report from Lazard’s private capital advisory team. The value of transactions this year is estimated to be 9 percent lower than that in 2021, when the secondaries market crossed the $100 billion milestone for the first time.

Demand for liquidity — cash — from both partners at private equity firms and investors will drive the secondaries market in the long term, according to the Lazard report. In a July survey, Lazard found that the top opportunity will come from investors that want to liquidate their stakes before the lock-up period ends. Many investors have ended up overweight private equity as the value of their public portfolios shrink. Partners at private equity firms, called general partners or GPs, also are looking for liquidity in the secondaries market as initial public offerings slow — a traditional way to exit companies.

“Looking forward, liquidity is likely to remain a key theme,” according to the report. “With traditional exits materially slowing, sponsors are expected to increasingly turn to the secondary market to deliver interim liquidity options to their LPs while also maintaining full ownership of trophy assets.”

Buyout funds are the most active sector of the secondary market. According to Lazard, 81 percent of GP-led transactions by value were invested in buyout strategies in the first half of 2022. That’s because investors in the current environment want to allocate capital to “established, profitable businesses which have proven resilience through previous downturns,” according to the report. Only 6 percent of GP-led capital was invested in growth and venture capital funds in the first six months of 2022, down from 12 percent last year. Three percent of GP-led capital was invested in credit and 10 percent was in real assets.

The Lazard report also noted that investors in private equity secondaries have prioritized deals with sponsors that they have worked with in the past, or the so-called “core GPs.” In the July survey, Lazard found that 66 percent of investors deployed more than half of their GP-led capital to these firms. The trend will likely benefit larger buyout funds more than it benefits growth equity investments, as the former have developed broader networks and longer-lasting connections.