What is a Private Equity Secondary Market?

The private equity secondary market refers to the buying and selling of partnership shares in a private equity fund. These transactions allow investors in private equity funds, which generally invest in companies in an effort to gain ownership, to sell part or all of their interests to other investors wishing to buy into the funds. This can occur via a simple cash buyout or through more complicated transactions involving the trading of investment securities. Using the private equity secondary market allows investors in a private equity fund to receive some liquidity from capital that would otherwise be trapped in the fund for a long duration of time.

Many wealthy investors buy into private equity funds as a way to diversify their portfolios with business ownership. These funds usually require a substantial commitment of capital, and also generally demand that investors keep their capital within the fund for a long period of time. One way to rectify this situation is through the private equity secondary market, which allows fund investors a possible way out of the fund even as others join.

A private equity fund generally gains money for its investors based on the performance of the companies in which it invests. This return on investment often requires a great deal of time to materialize. Investors can judge the value of the fund based on the net value of its assets. Whenever a partnership in a fund is sold into the private equity secondary market, this net asset value is usually the basis for negotiations.

In times of economic turmoil, the private equity secondary market is often the last refuge for struggling fund investors. If these investors need a quick infusion of cash, selling off a partnership in the fund can be a way to accomplish this. The problem is that many other investors may be looking to do the same thing during bad economic times, meaning that the supply of these fund shares may outweigh the demand. That results in sellers often wind up losing money on their sales.

By contrast, a robust economy can buoy the fortunes of private equity funds, meaning that sellers can get very near the net asset value of their fund shares from buyers. Portfolio managers often recommend the private equity secondary market to investors wishing to get involved with private equity. Certain types of structured deals between buyers and sellers may fit the specific needs of investors in the secondary market better than simple investing in a fund could.