The institutionalization of private wealth — Four potential benefits of adding secondaries
In our first article of our new series on the institutionalization of private wealth, we laid out exactly what was at stake for wealth managers: a generational wealth transfer worth an estimated $124 trillion in assets over the next 25 years,¹ but loyalty and continuity of service counts for very little as it pertains to those inheriting that wealth.
Staying competitive in a more uncertain and complex investment landscape is therefore their primary focus. And the trend we’re observing is that wealth managers are increasingly seeking to run their platforms more like institutional allocators. Firstly, this is to protect their clients in a more challenging environment, but secondly, and perhaps most importantly, for attracting new customers, is to expand their opportunity set.
Nowhere is this more relevant than in private markets, which can help address both challenges. In our last piece, we explored the role of co-investments in helping to enhance portfolio efficiency, but there’s a second way wealth managers can seek to institutionalize their offering.
Complementing existing portfolios with secondaries
We believe the private equity secondary market is set for another period of strong growth, underpinned by a narrowing bid–ask spread and increasing trading volumes following a decline in private market distributions, which we expect to continue.1 Limited partners (LPs) continue to grapple with liquidity pressures in a sluggish exit environment, while general partners (GPs) increasingly hold onto their highest-quality assets for longer through continuation vehicles. Against this backdrop, secondary transactions have emerged as a vital mechanism, helping investors manage liquidity, access established proven assets, and maintain exposure to quality opportunities in a complex market.
Secondaries encompass both LP-Led and GP-Led transactions. LP-Led deals help enable investors to acquire diversified fund interests — often at discounts to the GP’s valuation — while providing liquidity to the seller. GP-Led deals, particularly continuation vehicles (CVs), transfer prized assets into new structures, extending value-creation potential and offering investors the choice to stay invested or exit. The combination of these approaches has made secondaries an increasingly important part of private market allocations. However, investors should consider keys risks, which for GP-led deals includes both single asset concentration risk and the ability to source attractive deal flow in capacity constrained transactions. For LP-led deals the main risks include potential exposure to older assets with no viable route to monetization.
For advisors helping clients navigate private markets, incorporating secondaries offers four potential benefits:
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Mitigate the J-CurveSecondary investments typically involve acquiring more mature portfolios with limited uncalled commitments, which means distributions are likely to occur sooner than in traditional primary fund commitments. This helps investors bypass the extended lock-up period and delayed cash flows often associated with the J-Curve.
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Immediate exposure to known assets and themesBy investing in existing portfolios, there is no blind-pool risk, clients can evaluate tangible investment data before committing capital. This helps provide greater transparency and confidence for participants with strong GP networks who can work to position portfolios to access quality opportunities. Secondaries can also be a useful way to access thematic investments — particularly through continuation funds — offering targeted exposure to long-term structural trends with a lower risk profile as GP’s are re-committing to an investment and bolstering alignment.
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Opportunity for increased diversificationAs noted above, LP-led secondaries allow investors to access existing portfolios, reducing blind pool risk and often offering widespread diversification across vintages, sectors, and managers. Acquiring these existing portfolios may also offer access to restrictive GP’s who are otherwise difficult to access.
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Attractive entry valuations and faster return potentialSecondary deals are frequently acquired at discounts to the GP’s reference date valuation and have one or more quarters of value creation before closing. This can help provide embedded value from day one, enhance return potential, and lead to quicker realization of gains relative to traditional private equity commitments.
For wealth managers, secondaries represent a compelling way to capture many of the potential benefits of the asset class for their clients, while addressing common challenges around blind pool risk, extended draw down periods and access. A balanced allocation — spanning both GP-Led and LP-Led strategies — can potentially offer the best of both worlds : exposure to established assets, accelerated cash flows, and potentially improved access to thematic opportunities that may otherwise remain out of reach.
For wealth managers, having an effective process for manager selection is essential, given the wide dispersion of returns across private equity, valuation methodology and relevance, and the remaining upside in the underlying assets. Wealth managers also need to set appropriate liquidity expectations. While secondaries can accelerate cash flows relative to primaries, they remain private equity investments, so client timelines should be calibrated accordingly, with the understanding that distributions can still vary with market conditions. Finally, valuation discipline across market cycles is essential. Discounts and embedded value could enhance returns, but entry pricing is shaped by broader liquidity dynamics and exit markets, so managers should consider where we are in the private equity cycle when making allocation decisions.