Q: How much secondary transaction volume can the markets handle? Are we at, below or above that level?

— RIA, Southeast U.S.

A: Private equity secondary transaction volume has traditionally fluctuated between 2% and 5% of total private equity invested assets and in 2023 we saw transaction volumes just under 3% of invested assets.¹ We believe there are two main drivers poised to potentially grow that figure to 5% or higher.

Driver 1: The amount of private equity “dry powder” (committed, but unallocated capital) is at its lowest levels in the last 25 years on a relative basis when compared to the size of private equity invested assets (Figure 1). We believe this may increase demand growth in the private equity secondary market.

Figure 1: Dry Powder Ratios are Declining

U.S. Private Equity (2008)

In 2008, Private Equity dry powder was about equal to Private Equity investments

U.S. Private Equity Today (2023)

Today, Private Equity dry powder is less than half of Private Equity investments

• 15 years ago, there was roughly $1 dollar of dry powder for every $1 dollar of private equity in the ground.
• Today there is roughly 40 cents of dry powder for every $1 dollar of private equity in the ground.

While there are many ramifications of this trend, one consequence is fewer private equity dollars waiting to buy assets from other private equity managers.

Driver 2: Limited partners (LPs) in private equity funds are already struggling with low distributions from their private equity holdings as hold times have increased due to a challenging environment for exits.

In addition, the average ownership period of private equity assets has increased as private equity shops have moved away from financial engineering (e.g., increasing leverage, changing lease structure, dividend recaps) and toward operational value creation.² This process often takes longer, but may provide more durable returns.

GPs can hold assets for longer, while still meeting the distribution needs of their LPs, by leveraging “continuation funds” (GP-led secondaries) as they offer partial liquidity and the ability for GPs to maintain ownership of their best assets. GP-led secondaries are now roughly 50% of secondary volume.

As these two drivers converge, we believe secondary transaction volume will continue to grow, and we expect much of that growth to happen on the GP-led side of the private equity secondaries market.