The secondary market offers opportunities for those looking to get into the private markets as the overall sector continues to perform well, according to Hamilton Lane.

The Conshohocken, Pa.-based firm released its 2024 Market Overview this month highlighting different aspects of the private markets. One area it addressed is the secondary market, which it expressed confidence in due to a supply/demand imbalance that is fueling significant interest. There is more deal flow available than there is secondary funds and managers to deploy capital into the space, according to the overview.

“Despite the fact that there has been significant fundraising done in the secondary market there is still a supply/demand imbalance between the amount of supply there is coming into the secondary market [that] does not keep up with the demand that limited partners have to actually generate liquidity for their private market investments,” said Steve Brennan, managing director and head of Private Wealth Solutions, in an interview with Financial Advisor.

One reason for the imbalance is greater recognition by institutions about the value of the secondary market, according to Brennan.

“The secondary market has been recognized to be a portfolio management tool for investors of all sizes to be able to generate liquidity for private market investments,” he said.

The other reason is the growth of the general partner-led market, which has been spearheaded by those rolling over portions of their initial investments into continuation funds and seeking out additional investors in the secondary market, the report said.

There have been investments within certain duration funds that were reaching their expiration date. Rather than cash out, investors chose to roll the fund into another wrapper so they could continue to enjoy the success in that investment.

“That effectively allows them to take the cut of the fund that they’re in and create new vehicles for those investments to be managed in,” Brennan said.

By offering those funds in the secondary market, it gives investors the opportunity to gain access to that strategy. The market has grown so significantly that general partners now make up more than 50% of the overall deals within the secondary market, Brennan said.

Another area the report addressed is the current state of fundraising, which is down about 35% from its peak numbers for the second year in a row. The last time fundraising levels were at the current level was in 2017 when the markets were much smaller, according to the report. 

The fundraising numbers are off, relatively speaking, due to what Brennan referred to as the denominator effect. In a portfolio, an investor has a certain percentage of assets allocated in the public and private markets.  

With public markets on the decline heading into 2023 and private markets remaining relatively steady, it meant that investors were overallocated to their private investments and in many cases reached their target allocation. Once that occurred, they were cautious in their approach to invest additional dollars into the private space, Brennan said.

Another reason is that private market distributions over the past few years have been slow to return to the levels they were at a few years ago resulting in less money going back into the market, the report said.

“If you’re a long-term investor in the private markets and you’re not getting back as much in distributions as you have historically than you don’t have as much capital to redeploy into new opportunities and new funds,” Brennan said.

Hamilton Lane also said in the report that valuations for private funds are accurate.

“The reason we feel confident with them being accurate is that private equity-owned companies tend to generate really strong operational performance,” Brennan said. “The levers that private equity managers can pull to generate operational performance in a privately-owned company where they control the company are pretty significant.”