Private for Longer

The structural trend supporting growth equity

The number of publicly listed companies has been declining in the US since 1996. One reason is that smaller firms are trying to grow rapidly to capture market share and customers before listing. This delay in going public can result in higher long-term valuations. To achieve rapid growth, these smaller firms are turning more often to mega-rounds of private financing (over $100m).

This is where growth equity funds step in. Growth investments typically participate in later stage venture rounds, in the sweet spot between venture phase and fully mature firms. Over the past few years, investors have been very receptive towards these types of growth equity investments.

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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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