As the amount of money being committed to private equity has grown, there has been an increasing requirement for investors to be able to realise investments in private equity funds before the end of the life of the fund. This has led to the development of a secondary market in private equity funds, which has grown substantially in recent years. This in turn has resulted in an increasingly broad range of investors using the secondary market to refine their private equity investment strategies.

There are a number of reasons that a private equity investor might use the secondary market. It might be a simple requirement for liquidity. More usually, it is part of a strategic process with the objective of implementing a new allocation strategy for the asset class. At its most extreme, this can either be a decision to withdraw completely from the asset class, or to focus only on a specific area (for example buyout funds). Often, it is the result of a decision to either increase or decrease exposure to private equity; in the latter case, this can lead to a wish to exit from existing commitments.

Most private equity investors review their selection of managers on a periodic basis. This typically results in a decision to focus on those managers who they believe will out-perform over the next fund cycle. A logical next step is to realise interests in funds that are regarded as non-core.

A characteristic of the asset class is that it can take a long time for funds to be finally realised, often well beyond the initial 10 year term. For long term investors in the asset class, this results in portfolios that contain a large number of small interests in mature funds, that have low residual value, certainly when compared to more recent fund investments. The secondary market provides a useful way of exiting such investments, enabling the investor to focus on the funds which comprise the substantial value of the portfolio.

The secondary market has grown and evolved in line with the asset class, and now comprises a range of sophisticated buyers able to address a wide range of strategic and liquidity requirements. Within this market, Hollyport Capital specialises in smaller and often more complex transactions, typically under $20m, helping investors to manage and exit their legacy private equity fund investments.