4Q 2017 Analyst Note: No Longer a Secondary Concern
October 30, 2017
In our latest analyst note, we explore the history of the secondary market and its rampant growth in recent years, with a record $34 billion raised so far in 2017. Several factors are drawing both buyers and sellers to the secondary market, including the ability to dynamically adjust private market portfolios and the strong returns from secondary funds. While the secondary marketplace is dominated by large incumbents, the maturation of the secondary market has enabled these more specialized strategies that pursue areas where they see less competition and potential for outperformance. One example of this move toward more niche secondary strategies is SL Capital Secondary Opportunities III, which just closed on $428 million.
2017 has already set a record for secondary fundraising with over $34 billion raised across 18 funds. The average fund size has exploded to $1.8 billion as a few players dominate the space and have continued to consolidate.
Despite consistent growth in recent years and a buildup of dry powder, the secondary market has significant room for continued expansion, especially as managers raise more niche secondary funds.
The purported J-curve mitigation provided by secondary funds bears itself out in the data; the average secondary fund has achieved a DPI of nearly 0.6x by its fifth year, compared to roughly 0.4x for buyout funds and 0.2x for funds-of-funds (FoFs).