ROYC Secondary Market Analysis
Secondaries offer the most attractive investment opportunity since the global financial crisis
Our analysis further points to 5 key factors that will positively impact Secondaries over the coming quarters, driven by institutional investors’ need to use secondaries markets to manage their portfolios.
- Institutional investors are being increasingly active in portfolio construction to manage risk, exposure and return profile
- The increasing need for liquidity pushes institutional investors to sell existing private markets exposures to fund large commitments made between 2018 and 2021
- As secondaries markets have matured, there have been an increasing suite of investment types catering to different investors (i.e. GP-led deals gaining market share from classic LP-led deals) making portfolio construction easier and the overall market more liquid
- With stocks and bonds declining in value the denominator effect has left institutional investors overallocated to private markets, essentially forcing them to divest high-quality private markets assets. Secondaries markets are the best tool for investors to rebalance larger positions in their portfolios
- In light of substantially reduced IPO activity, secondaries markets have become the best alternative to exit investments for private markets investors
Even with continued macroeconomic headwinds, somewhat of a “perfect storm” has been created to invest in secondaries
Our analysis notes that secondaries transaction volumes are expected to reach $500 billion between 2023 and 2026. We also conclude that secondaries investors account for approximately 70% of total secondaries investment opportunities – the current supply of investment opportunities is significantly larger than the amount of investment capital.
The demand for liquidity combined with a market of forced sellers creates an exceptional market dynamic resulting in steep discounts to NAV
We believe that not only is there an abundance of high-quality deal flow that outweighs the amount of available buyers’ capital, but also that the best secondaries managers will be well-positioned enough to cherry pick the best assets and buy these at discounted prices - ultimately generating excess returns for investors.
Conclusions
- Returns
Secondaries managers have delivered the highest returns with the lowest risk across all private markets over the long- and short-term
- Exceptional buying opportunity in the medium- to short-term
There are substantially more sellers than buyers of high-quality, profitable private businesses in the market right now
- The “perfect storm” is now
We see a surplus of attractive investment opportunities that secondaries investors can acquire with steep entry discounts