A new wave of investors is emerging in the secondary market, committing to a slew of funds that are raising billions to snap up PE positions from other LPs looking for early exits.
Kaiser Permanente, Los Angeles County Employees Retirement Association and the British Columbia Investment Management Corp. are leading the parade of LPs hawking PE positions to generate much-needed cash and rebalance overcommitted private market portfolios.
Yet, LP-led secondaries continue to raise and deploy record amounts. Evercore reports $114 billion invested in secondaries in 2023, the second-highest annual amount recorded compared to $160 billion raised. A little more than half the cash invested went to purchase LP stakes.
Someone is buying.
The retail channel is one type of buyer turning to secondaries.
Coller Capital, one of the first secondary-focused firms, earlier this year announced the launching of secondaries fund of more than $300 million marketed to accredited investors in the U.S.
“There’s a whole slew of RIAs and multifamily offices who are new to the private markets, they’re flush with cash and they’re shifting cash toward private markets, ” says Kline Hill Partners partner Jared Barlow. “This trend is still just getting started. I think it’s a multi-year trend for this kind of retail interest in secondaries.”
Barlow, who co-leads the firm’s investment strategy, says these new secondary consumers are seeking to expand their private market commitments from the “low single digits to the high single digits and low double digits.”
Kline Hill is among the dozens of firms currently raising funds to buy LP positions.
Kline Hill launched as a secondary-focused firm in 2015 and is well established in the lower middle market, making purchases of usually no more than $10 million each.
Though established LP-led players are competing with new entrants to raise ever-larger funds, Barlow says there is still not enough dry powder for the rising number LP stakes hitting the secondary market.
The ratio for the broader private equity market is about 4.5 times dry powder to closed investments, according to Preqin.
And deal volume is expected to surpass 2023, all of which makes for a buyer’s market.
BlackRock (NYSE:BLK), which is seeking to raise $4 billion for its second secondaries fund, says LP stakes on average traded at 85 percent NAV in 2023, up from 81 percent in 2022. Buyout stakes priced higher at 91 percent of NAV.
BlackRock’s inaugural secondaries fund closed at an oversubscribed $2.4 billion in 2021.
Smaller pension funds are another new buyer investing in LP leds, usually with similar reasons of the other secondary debutantes. They’re looking to expand their private market portfolios in an asset class that mitigates some of the illiquidity and the full J-curve hit of a traditional 10-year PE commitment.
A recent Coller Capital survey of 110 LPs showed 45 percent of them expect to increase their private credit allocations and 38 percent plan to bolster their secondaries holdings, the two big asset classes cited for increases.
San Diego Retired Employees Association‘s CIO Stephen Sexauer says the $13 billion pension plan has plenty of cash to enter a buyer’s market.
“Now is the time to act,” Sexauer said at the June board meeting. “We have more distributions than capital calls. We can move immediately.”
The $670 million Massachusetts Water Resources Authority, for instance, recently received 21 responses from shops responding to its desire to commit as much as $18 million to an LP-led strategy.
One of the biggest secondary shops, HarbourVest, recently informed that it closed fundraising for its Dover Street XI secondaries vehicle after hitting its $12 billion hardcap.
Boston-based Harbourvest says it splits its Dover Street funds evenly between GP-led and LP-led transactions.
The Boston firm raised $8.1 billion for Dover Street X, which closed in 2020 and $4.8 billion for 2019’s fund IX.
Because it hit its hard cap, Harbourvest pulled out of the running for MWRA’s LP-led commitment. The $600 million MWRA is still considering 20 other funds that responded to its request for LP-led proposals. They are:
| Firm | Goal | Raise | Date | Firm | Goal | Raise | Date |
| Abbott Cap Fund III | $450M | $234M | Q4 | BlackRock Secondaries II | $4B | $1.5B | Oct |
| Capital Dynamics GSCE IV | $850M | $796M | Oct | Carlye AlpInvest Secondaries Fund | $10B | $6.6B | Dec |
| Coller Capital Fund IX | $10B | $5.5B | Q1 | Fort Washington Opportunities Funds | $400M | $95M | Mar |
| Glouston PE Opportunities VII | $450M | $298M | Dec | Grosvenor Secondaries VIII | $1.3B | NA | Q4 |
| HG Capital Auda Fund VI | $500M | 112M | Q1 | Savano Capital Fund IV | $250M | NA | Q1 |
| Knightsbridge Fund III | $300M | $117M | Q4 | Mesirow PE Secondary Fund I | $250M | NA | ’25 |
| Newbury Equity Partners VI | $2.5B | $215M | ’25 | NB Strategic Capital Fund II | $2.5B | $1.2B | Q4 |
| Northern Trust PE Opp. Fund V | $750M | $625M | Dec | Nimble Partners Opportunities II | $200M | NA | Jun |
| Partners Group Secondary VIII | $6B | $750M | Mar | Pantheon Fund VIII | $2.25B | NA | ’26 |
| Portfolio Advisors Secondary V | $3.5B | $980M | Jan | Tail End Fund II | $250M | $50M | ’25 |
The board voted to eliminate Nimble, Savano, Knightsbridge, Pantheon, and Newbury from consideration “for reasons including lack of track record, long deal horizon (i.e., it could take two years to start funding), and refusal to agree to side letter requirements,” according to the minutes of the April meeting.
The Chelsea, Mass. LP plans on scheduling a special meeting to interview Coller, Mesirow, Northern Trust and Portfolio Advisors.
Contact Kline Hill’s Barlow at [email protected]
