Outlook for alternative investments: Navigating the secondaries market

The secondaries market has emerged as a central component of alternative investment strategy, reflecting the structural shift toward larger private market allocations within institutional portfolios. As private equity and private credit have grown, the secondary market has evolved to serve a critical role in asset liquidity and portfolio management, offering investors nearly as diverse an opportunity set as the primary market itself. According to Mercer's investment team, the past decade has witnessed substantial growth in secondary market activity, expanding potential exit routes for alternative assets while simultaneously creating new entry points for capital deployment.

The appeal of secondaries lies in three distinct strategic advantages. First, secondary funds enable faster capital deployment compared to primary commitments, reducing the drag period where capital sits uncommitted. Second, they mitigate the J-curve effect—the typical initial underperformance of vintage-year private equity funds—by allowing investors to enter funds in later years when returns have begun to materialize. Third, secondaries offer enhanced portfolio diversification, allowing institutions to build diversified exposure to multiple vintage years and strategies simultaneously, rather than concentrating capital in a single annual commitment.

The market backdrop supports continued expansion, particularly in credit secondaries where investor demand remains robust. Small and lower mid-market segments are positioned to benefit disproportionately from improved liquidity conditions and a wider range of exit mechanisms. These dynamics have driven alternative assets under management expectations toward $17 trillion by 2025, with average annual growth rates of approximately 9.8 percent. Retail investors and retirement systems have also begun participating more actively in private markets, supported by regulatory changes that have expanded access to alternative strategies.

However, the secondary market presents material risks requiring disciplined due diligence. The primary concern is that secondary positions may become liquidity outlets for underperforming assets, where sellers offload troubled investments at discounted valuations. Institutional investors must evaluate the quality of underlying assets, the performance trajectory of source funds, and pricing discipline to avoid capital destruction. Historically, secondaries have generated attractive returns with low volatility relative to broader private markets, but this performance depends critically on accurate asset assessment and rigorous underwriting.