Capital Formation Transformation in the Secondary Market (Baird)

Summary

• Global investable asset value is projected to reach ~$350 trillion by 2025, with ~$220 trillion (~65%) attributable to high-net-worth investors diversifying into private markets.p.2
• Evergreen vehicles maintaining secondary allocations hold an estimated ~$50 billion in aggregate AUM.p.3
• Over the last twelve months, more than $11 billion in dry powder was raised across evergreen vehicles, with nearly $6 billion deployed into secondary investments.p.3
• Over 95% of the ~$6 billion in LTM secondary dry powder was generated via new investor inflows rather than recycling.p.3
• Some evergreen vehicles participating in LP portfolio secondaries are underwriting to lower return targets of 10–12% IRR.p.3
• The secondary-focused evergreen fund market is projected to expand to approximately $200 billion within 5–10 years.p.4

Key insights

1. The long-standing undercapitalization of the private equity secondary market is being softened by the rise of retail and high-net-worth semi-liquid funds.p.2
2. Secondary strategies are well-matched to semi-liquid '40 Act structures due to immediate diversification, rapid capital deployment, and regular cash distributions.p.2
3. Deploying '40 Act fund capital alongside traditional institutional closed-end funds can nearly double secondary buyers' overall purchasing capacity.p.2
4. The ~$6 billion deployed annually by evergreen funds represents the equivalent deployment capacity of a traditional ~$24 billion four-year secondary fund.p.3
5. Lower cost-of-capital evergreen vehicles have pushed up secondary transaction pricing, intensifying competition in LP-led portfolio secondaries.p.3
6. Price competition in LP secondaries is shifting traditional secondary fund focus toward GP-led transactions where evergreen funds participate less.p.4
7. Secondary-focused semi-liquid evergreen vehicles are anticipated to generate tens of billions of dollars in annual dry powder as the market matures.p.4