Private market secondaries are growing at speed. Simon Tang, Head of US at Accelex, explores how the volatile macroeconomic environment, including the increased flows in both private and public equities, is supporting increased activity in the secondaries market.
Transaction volumes in private market secondaries are growing rapidly. In the first quarter of 2025, a total of USD40 billion in LP-led deals was executed. When compared with the USD89 billion volume seen across the whole of 2024, it’s clear to see we are on track for another record-breaking year in the secondaries market.
Private markets have historically been used in a broader institutional investment portfolio to hedge against more traditional equities and fixed income on the premise that the asset class does not have a strong correlation with traded securities. However, this is beginning to change, given the pressure and uncertainty that geopolitics and economic policies have placed on global trade so far this year.
Tariffs, and in particular the uncertainty around them, could impede company margins and growth, both of which are essential drivers of value creation in the private equity model. With challenges bearing down on asset-level operating fundamentals and return prospects coming into question, institutional investors are taking a second look at their asset allocation strategy and primary investments in private market funds.
Headwinds to margins, and especially operating growth, threaten returns and extend exit horizons, which ultimately compromise liquidity and net internal rates of return (IRRs) for Limited Partners. As a result, investors are questioning whether their private investments can adapt to uncertain and volatile market conditions. The answer for many is to unlock more liquidity from their private assets, and secondaries hold the key.
Tariffs and the secondaries market
Tariffs are having a significant impact on global markets. Although the initial effects were felt most severely in share prices of listed equities, the shockwaves are spreading to Main Street, including family-owned businesses, SMEs and private equity-backed companies. Public or private, few businesses are immune to tariffs as companies are impacted either directly or indirectly in this integrated global economy.
As these challenges drive uncertainty in the private equity value creation model, and consequently, returns, investors are turning to the secondary market. For GPs, their initial investment thesis, modelling for portfolio companies and exit strategies, could now be completely upended. Additional time or a reset could be the best way forward for some assets, which is driving GP-led opportunities in the secondary market. Similarly, these economic and market developments are providing LPs with the opportunity to rebalance their portfolio of primary funds. Especially with multi-billion-dollar secondary-focused funds being raised and now increasingly common in the industry, there is certainly liquidity available for primary investors to derisk and provide LP-led deal flow to the market.
While some LPs may offload some of their primary funds in the secondary market, these same LPs could also be buying secondary opportunities which are now repriced, either to access GPs and funds that they previously could not, or to acquire positions at below net asset value (NAV). This provides them with protection from any potential downside within their portfolios, without reducing their overall exposure.
Shifting interest rates
Interest rates are a key driver of asset allocation strategies. While rates started their climb in early 2022 in response to rampant inflation, they have since moderated over the past year, leaving their recent peak in 2024. From a portfolio perspective, interest rate declines drive investors to take risks such as investing in equities, including private equity, where they will earn higher returns compared to fixed income. Decreasing interest rates also reduce the cost of capital, making lenders more willing to lend for yield and borrowers more willing to borrow to fund growth. In this way, lower rates create a more favourable environment for deal-making and business.
With lower interest rates driving increased liquidity in capital markets, GPs can use more cost-efficient debt in their deals, which can drive returns upon exit while also preserving the equity capital from their funds to invest in more assets. However, rising deal leverage multiples also increases the risk profile of those companies. Should tariffs result in slower growth, reduced margins or even a recession, these highly levered investments will face significant headwinds, as was the environment in 2006-2007 through the Global Financial Crisis.
Low interest rates drive public markets, which inherently have upward implications on private markets as GPs often use mark-to-market valuations for their portfolio companies. Rising NAVs combined with stronger underlying asset growth, secondary trading spreads of private market investments will ultimately narrow, with premiums rather than discounts becoming the norm.
In 2024, for example, LP-led secondary transactions averaged 89 per cent of net asset value. This represents a significant tightening compared to previous years, indicating that buyers were willing to pay closer to NAV, anticipating portfolio value appreciation in a stable market environment. If interest rates decline, it would not be surprising to see that measure increase in 2025 and beyond.
Secondaries hold the answer
Shifts in the market are becoming more frequent, and the years ahead appear fraught with further volatility, given the current geopolitical landscape. In such an uncertain environment, being able to adapt quickly to market developments is no longer a luxury but a necessity.
With their ability to enable easier access to liquidity, secondaries empower private markets investors to make the fast-paced decisions necessary during times of high volatility, such as now.
Although this is a huge opportunity for growth in the secondaries market, there are still operational challenges that many investors must overcome. In particular, efficient access to asset-level operating performance data is the key to unlocking successful investing in private market secondaries.
