Secondaries in 2025: building on a record year

 
While distributions from private funds were up in 2024, the ongoing need for liquidity drove limited partners to the LP-led secondaries market, where they were met with increasing demand from record levels of dry powder throughout the calendar year³. A sustained uptick in valuations (likely driven by this demand but also tracking very strong U.S. equity markets) went a long way to close valuation gaps between potential sellers and buyers. For many first-time sellers of LP interests⁴, improved valuations were enough to convince them that the secondaries market is a key tool in their portfolio management toolbox. Driven by the same demands for liquidity and expanding dry powder, GP-led secondaries also continued to grow in popularity, ultimately reaching a record $71 billion in total GP-led deal volume in 2024⁵.

What does the 2025 deal outlook mean for secondaries?

Many market participants expect that 2025 will bring a more active traditional M&A exit environment, driven by lower interest rates and a business-friendly administration in the U.S. The question, therefore, for secondaries markets is how they will react to a less countercyclical environment and whether the ongoing growth in the space will continue in a more bullish market.

As previously noted in our PE Pulse 2024, most market participants believe that secondaries markets are here to stay, bolstered by the emergence of new programmatic sellers, which now have muscle memory from liquidity-generating sales in recent years. Notably, pension funds accounted for a third of all secondaries deal volume in the first half of 2024⁶, illustrating the ongoing need for liquidity for these institutional sellers against the backdrop of a strong pricing environment. Moving forward, we expect many of these repeat institutional sellers (including a number of Canadian pension plans) will increasingly look to execute LP-led secondary sales as a way to actively manage their fund portfolios. On the other side of the table, we expect that a flurry of fundraising in recent years by increasingly large secondary flagship funds and new evergreen secondary funds flush with retail investor capital (including, in particular, new ’40 Act funds) will continue to drive demand.

Continued momentum for GP-led secondaries

LP-led transaction volume was very strong in 2024 (reaching $89 billion in deal volume, up 41% year-over-year⁷. However, in 2024, GP-led secondaries also continued to show significant momentum in the context of a market environment where traditional exits have been difficult to achieve and growth in this space in the coming years could ultimately outstrip growth in LP-led secondaries. Fund sponsors are increasingly comfortable with GP-led secondaries as a tool to retain trophy assets in their portfolio and to double down on key portfolio companies for which they have high conviction. Continuation funds now represent a record 14% of total sponsor-backed exit volume⁸. The potential follow-on capital provided by secondaries funds represents a growing tool for injecting resources into portfolio companies while freeing up liquidity for limited partners at attractive valuations.

On the demand side, institutional investors are increasingly focused on becoming more active in the buy-side of the GP-led market while major sponsors such as Accel KKR and Leonard Green have launched dedicated funds to back GP-led deals. Additionally, limited partners are increasingly aware of opportunities in the secondaries space, including the potential opportunity costs of being a systematic seller when presented with a potential continuation fund decision by their fund sponsor partners (shown to be around 8% per vintage year)⁹ as well as ensuring appropriate protections for passive co-investments to address potential future exits to a continuation fund. The increased sophistication of the limited partner community with respect to GP-led processes will mean that sponsors considering a continuation fund will need to have a strong narrative before embarking on this type of sale process.

Secondaries meet the retail investor trend

The ongoing influx of private wealth pursuing secondaries transactions also represents a key trend to watch in 2025 and beyond. Secondaries help mitigate the J-curve and offer important diversification, making the asset class an attractive one for retail investors. As of September 2024, over $5 billion had been raised in the secondaries space by registered ’40 Act funds in the year prior—a flood of retail dry powder that will need to be put to work quickly¹⁰. This represents a potential selling opportunity for many institutional sellers: motivated buyers seeking a way to seed their new funds’ portfolios.

LP-led secondaries, in particular, provide a significant amount of cash flow resulting from older vintage funds being acquired (i.e., there is greater proximity to distribution activity for funds beyond their investment period), which is particularly appealing to retail investors. This trend is likely to only expand over time as the incoming U.S. presidential administration seems poised to expand access for retail investors to private capital, which would represent a significant tailwind for the secondaries space¹¹. We expect these developments to similarly accelerate north of the border in Canada, as previously noted in our article, “Retail revolution? The democratization of private equity”.

What we are seeing

Tracking these market trends, Torys had a record year in 2024 in the secondaries space, assisting institutional and secondaries fund clients with significant buy-side and sell-side LP-led transactions while continuing to represent investors in continuation funds and sponsors considering GP-led processes as an alternative to traditional exit options. On a market-wide basis, most participants expect the ongoing momentum to continue, with predictions of $170 billion or more in deal volume in 2025¹². With the backdrop of a poor exit environment in 2022 and 2023 continuing to drive liquidity needs, and momentum driven by institutional investors and fund sponsors with recent experience in the space, we similarly expect that secondaries markets will both remain robust in 2025 and continue to grow and innovate in the years ahead.