Key Takeaways
- • Secondary private equity market volume surged to $132 billion in 2021, up from less than $1 billion in 2000, demonstrating radical two-decade growth despite being characterized as "small and inefficient" by Commonfund Capital managing director Cari Lodge.
- • Expected 2022 contraction to $110 billion reflects market correction, but Lodge projects 2023 will become "the largest market ever" as portfolio volatility and valuation lags drive increased seller activity among institutional allocators.
- • Capital insufficiency constrains market growth—insufficient secondaries-focused funds and limited capital mean only highest-quality assets and best risk profiles are being acquired, leaving substantial untapped capacity.
- • Denominator effect accelerating secondaries demand—as public markets decline and private market valuations lag, private investments now represent a larger portfolio allocation percentage, compelling LPs to rebalance through secondary transactions.
- • 3,000 private funds raised annually over the past decade create recurring secondary market opportunities, with most investor participation driven by liquidity needs rather than performance factors alone.
Summary
The secondary private equity market remains structurally underdeveloped despite explosive growth over two decades. Cari Lodge, managing director at Commonfund Capital, characterized the market as "small and inefficient" while speaking at the SALT conference in New York on September 12, 2022. The data supports her paradoxical assessment: secondary deal volume reached $132 billion in 2021, representing extraordinary expansion from less than $1 billion when Lodge entered the field in 2000. Yet relative to the scale of private fund formation and the liquidity demands of institutional investors, the market has not yet reached maturity.
Lodge expects secondary deal volume to moderate to approximately $110 billion in 2022 as public market declines ripple through valuations. However, she anticipates a significant rebound, projecting 2023 will deliver "the largest market ever" for secondary transactions. This forecast rests on two structural factors: the denominator effect and valuation lags. As public equity and fixed income markets have declined substantially, private market valuations—reported with characteristic delays—now represent a larger percentage of typical allocator portfolios. This disparity compels institutional investors to execute secondary sales to rebalance allocations and access liquidity.
A critical growth constraint is insufficient capital deployment capacity. Lodge emphasized that "there are not enough funds to buy up all the secondaries. There's not enough capital." This supply shortage means only the highest-quality assets and strongest risk profiles command buyer interest, leaving substantial secondary inventory undervalued or held longer than sellers prefer. The market's inefficiency creates opportunity, but capital limitations prevent efficient price discovery and transaction velocity.
The scale of new fund formation supports sustained secondaries demand. Over the past decade, approximately 3,000 private funds have been raised annually, creating a continuing pipeline of investors requiring exit mechanisms, portfolio optimization, and liquidity solutions. Lodge noted that most secondary participation is driven by liquidity needs rather than performance considerations, indicating that the growth trajectory will persist independent of private equity return cycles, provided allocators maintain diversified investment programs.
Lodge expects secondary deal volume to moderate to approximately $110 billion in 2022 as public market declines ripple through valuations. However, she anticipates a significant rebound, projecting 2023 will deliver "the largest market ever" for secondary transactions. This forecast rests on two structural factors: the denominator effect and valuation lags. As public equity and fixed income markets have declined substantially, private market valuations—reported with characteristic delays—now represent a larger percentage of typical allocator portfolios. This disparity compels institutional investors to execute secondary sales to rebalance allocations and access liquidity.
A critical growth constraint is insufficient capital deployment capacity. Lodge emphasized that "there are not enough funds to buy up all the secondaries. There's not enough capital." This supply shortage means only the highest-quality assets and strongest risk profiles command buyer interest, leaving substantial secondary inventory undervalued or held longer than sellers prefer. The market's inefficiency creates opportunity, but capital limitations prevent efficient price discovery and transaction velocity.
The scale of new fund formation supports sustained secondaries demand. Over the past decade, approximately 3,000 private funds have been raised annually, creating a continuing pipeline of investors requiring exit mechanisms, portfolio optimization, and liquidity solutions. Lodge noted that most secondary participation is driven by liquidity needs rather than performance considerations, indicating that the growth trajectory will persist independent of private equity return cycles, provided allocators maintain diversified investment programs.
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