Opening doors

The liquidity offered by the secondaries market has a critical role to play in opening up the asset class to a new set of investors.

Private equity investment products have traditionally been the domain of institutional investors. However, in recent years a new investor demographic is entering the asset class via semi-liquid investment solutions. But what does semi-liquid really mean?

Private equity at its core will always be an inherently illiquid asset class in order to allow private equity fund managers to drive value-creation in the companies they invest in – and it can often take several years until these companies can be sold again.
Any semi-liquid private equity product will therefore need to be designed with that constraint in mind. Investors are well advised to pay special attention to the underlying asset allocation of the semi-liquid product under consideration. In our view, private equity secondaries will play an important role for all semi-liquid product asset allocations, given the liquidity profile of this sub-asset class.

However, not all secondaries are created equal: LP-centric transactions, i.e. the purchase of fund interests from selling investors, have traditionally exhibited very attractive liquidity profiles as buyers acquire mature pools of assets. And although overall quality, transaction dynamics and market pricing of LP-centric transactions have improved markedly since the beginning of the year, the dramatically changed market environment make these difficult to assess. GP-centric transactions, in our view, are quite attractive currently, but the liquidity profile for these types of deals is very different than for LP-centric transactions.

Defining an appropriate asset allocation and balance between LP-centric and GP-centric transactions, while managing investors’ expectations with regards to liquidity carefully, will be important considerations for anyone wanting to offer their client base access to private equity via a semi-liquid investment solution.

Tanja von Ehrlich, Head of Wholesale REPM, and Jochen Mende, Head of Secondaries, share their perspectives and how semi-liquid investment solutions and private equity secondaries will fuel the democratization process of private equity.