Whitehorse Liquidity Partners’ $4 billion new secondary fund closed $1 billion over its target, the latest anecdotal evidence that the secondary market is heating up. But there are signs the market isn’t entirely sold on GP-led exits.

Secondary fund advocates point to increasingly structured deal terms in an otherwise illiquid market, and a Covid-related dearth of exit options for funds eager to offload long-term portfolio holdings as drivers of interest. And with backers like Pennsylvania Public School Employees Retirement System in the latest Whitehorse fund, and Minnesota State Board of Investment and Alaska Permanent Fund Corp in previous rounds, the trend appears strong.  

A look at historical secondary fundraises indicates that the market might have lingering concerns about these vehicles. After steady growth in aggregate funds raised from 2013 to 2016, capital raises have been choppy, according to data provided by Preqin. Only three funds launched during 2020’s presumably favorable climate for secondary investors: funds looking to offload portfolio holdings during Covid faced nearly unprecedented uncertainty from conventional buyers. Last year’s $6 billion haul approached 2018’s decade-long high of $7 billion. But the high-then-low pattern of raises in the past ten years prompts a rethink of secondary’s move to the mainstream.

Some drivers for GP-led transactions look to be cooling off. The worst of pandemic-spurred sales to raise liquidity could be behind us. Vaccinations continue to climb, potentially removing one catalyst for sellers to shorten their investment horizons. Larger portfolio companies might look to public markets that generated liquidity approaching the dot-com era rather than negotiate terms.

There is also a potential oversight concern. Secondary deals are often beyond the scope of limited partner agreements, limiting the transparency of transactions to LPs and potentially creating conflicts of interest. Deals can peg the value of a company to a level designed to inflate performance fees upon a future exit.

These concerns don’t exist in a vacuum. Whitehorse’s new fund is targeting 10 to 15 deals with target valuations between $100 million to $500 million. That size range could facilitate restructurings at companies too small to consider a public listing. And the Wall Street Journal reports that over half of the fund’s investors are new, indicating growing interest in the strategy. Time will tell how mainstream the vehicle becomes.