Private equity (PE) firms often buy and sell stakes in companies to generate profit and help clients raise capital and find high-yield investment opportunities. They also facilitate selling or buying of secondaries. PE secondaries are no longer considered to be the last option for investment, and investors have started preferring PE secondaries due to increased flexibility.
What are PE secondaries?
These are existing investments in private companies that are bought or sold in the market. If you purchase a stake in a private company from an existing investor, you become a secondary investor. The existing investor selling their stake in the private company is the primary investor. A few decades ago, investors traded in secondaries when there was no other option. This has changed because investors now consider PE secondaries to be more flexible than regular investments. With secondaries, PE firms or individual investors could make an early exit.
Also with secondaries, the primary investor can liquidate their assets. Rebalancing portfolios is another benefit of trading in secondaries. Even though the secondary market consists primarily of PE assets, other asset classes are also available. PE firms are not the only ones that buy and sell secondaries; limited partners (LPs) and general partners (GPs) also engage in this trade.
Say a PE firm has invested in a private enterprise for many years. The PE firm now wants to exit. It does not want to wait for the private enterprise to go public or be sold to another company. Since the PE firm intends to make an early exit, it has no option but to deal in secondaries. In this case, a second investor will buy the stake in the private company from the PE firm. The PE firm was the primary investor, and the new stakeholder will become the secondary investor. The secondary investor will not wait for the company’s growth, as it has already grown.
Why has demand for PE secondaries increased?
Investors looking for liquidity can trade in Private equity secondaries as can investors looking for an early exit. Investors can also increase their reach in private companies with secondaries. Some investors prefer shorter investment tenures, and there is no better choice than PE secondaries. PE secondaries also help investors rebalance/realign their portfolios.
PE secondaries offer the chance of high returns. Compared to traditional stocks of public companies, private company shares may grow exponentially. As a result, private companies have more chances for growth, and investors would benefit. An investor would purchase shares in a private company when it is already on track for growth.
PE secondaries offer investors more flexibility than other options. Investors do not need to wait for an IPO or other event to exit. They can sell secondaries anytime to other investors. If they sense a risk involved with the secondaries, they could sell them for immediate profit.
With secondaries, you are buying stakes in private companies that are already established. The private company will have a reputation in the market and high growth potential. It significantly reduces the risk for secondary investors, as they have more chance of obtaining a high return.
PE secondaries allow investors to diversify their portfolios. Private companies are likely to grow but do not offer stakes easily. It may be challenging to buy stakes in a private company directly. With PE secondaries, one can buy stakes in private companies at discounted prices.
Investors can consult PE firms on trading secondaries. PE firms also require external support to find the right secondary investments in private companies. A reliable research-oriented third party could help PE firms locate secondaries and provide support throughout the secondary lifecycle – from deal origination to exit.