Private market secondaries are going from strength to strength. In 2024, secondary transaction volumes hit a record $160bn, marking a 41% year-on-year growth rate. This increase has been propelled forward by LPs’ consistent liquidity needs, a strong investor-led push to diversify portfolios, a rush to rebalance private markets positions, and the growth of GP-led secondary opportunities as tariffs and geopolitical uncertainties shake up capital markets and the global status quo.

Broadly speaking, this growth is a huge positive for private markets. Secondaries are an important tool for primary fund investors by providing a channel for an early exit and a lifeline of liquidity in a market that is infamous for locking up committed capital for long periods of time that can reach ten years or more. However, this growth in the secondaries market comes with its own challenges. As transaction volumes, allocations and deals boom, so too does the amount of unstructured information transferred within this market between sellers, brokers and buyers.

Greater information availability would normally be viewed as entirely beneficial for investors. However, given the unstructured and inconsistent nature of private markets data, higher volumes present unique challenges for those entering the market or attempting to grow their allocation to secondaries.

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A growing data problem

Unlike public markets where data feeds exist and data are standardised and easy to access, private markets are mired by unstructured and unstandardised documents, including fund quarterly performance reports, financial statements, cashflow notices, and capital account statements, among others. Limited Partners (LPs) still rely on the PDFs provided to them by General Partners (GPs) to share critical investment data. Within the secondaries market specifically, unstructured documents from a broader portfolio opportunity with many underlying funds can lead to significant volumes of data being overlooked or not accessed for investment analysis.

A traditional secondary investment underwriting process is typically based on a triage approach. The idea is to identify the investments that bring the most value to a fund and the broader fund portfolio.The next step is to dedicate human resources to manually extracting and transferring this subset of data, including time-series company operating performance metrics, from the documents to a spreadsheet to feed the investment underwriting models.

This is a tedious process that is time-consuming, error-prone, lacks digital auditability and does not effectively scale as investment activity grows with the market. Ultimately, a substantial amount of valuable private markets investment data is left behind in the documents due to triage.  

Coupled with this triage challenge is that some private market strategies rely on mark-to-market valuations, which means current quarter value drivers may not be going forward.Those funds and underlying assets that were triaged out of the underwriting process could indeed become key value drivers and vice versa. Robust secondary investment modelling and underwriting should be based on a complete set of portfolio data. Additionally, as more opportunities enter the deal funnel, the unstructured content can be transformed into structured and normalised private markets investment data to not only underpin underwriting, but also further leveraged as a feed into a data lake for market intelligence.

By effectively addressing these data challenges, secondary investment teams can focus on performing more comprehensive underwriting analysis across the deal opportunities and qualitative due diligence such as GP succession planning, key man risk, performance attribution by partner, deal exit strategy and other important factors that are not directly reflected in the documents or data. Meanwhile, clearing up these data challenges also enables them to more easily meet the tight timelines that are usually attached to these secondary opportunities.

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The need to stay ahead of the risks of a hot secondary market

As dry powder in the secondary market grows rapidly, with billion- and multi-billion-dollar secondary-specific funds becoming increasingly common, this massive influx of buy-side capital is encouraging the sell-side to keep pace, driving the growth of opportunities available in the market. However, if a balanced equilibrium is not maintained, premiums to NAV will become the norm, and that is a risk that undermines a key rationale for investing in secondaries: price arbitrage.

A secondary investment that is priced at a premium to NAV will need to deliver even higher returns to justify the buyer’s acquisition. Couple this with a global macroeconomic environment that is volatile and uncertain in the near to mid-term, and the forecasted operating performance of portfolio companies could be more pro forma than ever before. A secondary investment made at a premium and then facing economic headwinds or a downturn would be a larger risk than the same investment as a primary. This scenario results in significant risk for secondary fund portfolios, their investors and asset management buyers in the market.

Exacerbating this risk is the traditional deal triage approach. From an investment perspective, secondary deal flow triage can lead to gaping holes in models and the underwriting process, which could result in assets that are mis-priced and discount/premium offers to sellers that are not as robust as they should be. The ramifications on portfolio risk can be very significant: buy-side offers that are inaccurate by a mere 100bps across an overall $10 billion portfolio could result in $100million of downside.

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The importance of robust data

To mitigate the risk, secondary buyers must have a deep and robust underwriting process that fully leverages the investment data made available in the transaction by the seller or broker. Only with a complete set of data can there be comprehensive modelling, which drives stress-tested discount and premium offers.

As the secondary market continues to grow, the sheer volume of unstructured content is becoming unmanageable. The pressure is on to rethink old processes and embrace innovative, yet private markets and use case-specific technology, to stay ahead.

In the final article of this series on secondaries, we’ll discuss just this – the role of technology, such as private markets AI for LPs, and the solutions for tackling opacity and unstructured data in the market.

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