Private Equity Secondaries: Diversification at a Discount

The importance of an alternative private equity asset class

In the late 1970s, regulatory changes permitting US pension funds to invest in private equity transformed the asset class and drastically increased the number and volume of private fundraisings. By the mid-1990s, private equity had already started maturing and institutional investors allocated as much as 15% of their portfolios to private equity. The implementation of new regulation around this time, however, introduced requirements for commercial banks and insurance companies to hold higher capital reserves to support their alternative asset investments.

These requirements fuelled the need for a secondary market, as institutions moved to reduce their exposure. As a result, the first secondary focused funds were launched towards the back end of the decade. But what is distinct about the nature of the transactions underlying these secondary funds? A secondary transaction is an “over the counter” transaction, which in its simplest form, entails one investor buying the current ownership rights and assuming any remaining commitments from the existing investor.

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