Private equity secondaries: Structural advantages for portfolio construction

The private equity secondaries market has evolved over the past two decades from a niche solution into a bona fide asset class offering benefits for limited partners (LPs), general partners (GPs) and secondary buyers. With transaction volumes growing from $26 billion in 2013 to over $160 billion in 2024, secondaries are a compelling option for consideration within diversified portfolios.¹

For financial advisors and their clients seeking private equity exposure with potentially enhanced risk-return characteristics, the secondaries market offers compelling structural advantages that merit consideration.

Two distinct pathways to value

Private equity secondaries refer to the buying and selling of existing private equity fund interests and direct company investments, rather than making new primary investments into companies or funds. The secondaries market operates through two primary transaction types, each offering unique benefits:

LP-led transactions involve investors selling their stakes in private equity funds to generate liquidity or rebalance portfolios. These transactions provide buyers with immediate diversification across multiple portfolio companies within established funds, along with visibility into actual performance rather than historical manager track records.

GP-led transactions, primarily structured as continuation vehicles, allow private equity firms to retain control of their highest-performing assets while providing liquidity options to existing investors. These transactions typically focus on trophy assets where sponsors see significant additional growth potential.

Both transaction types have demonstrated attractive performance characteristics, with secondaries showing the narrowest return dispersion of any major private markets asset class over the past 25 years (see Figure 1). ²

Structural advantages of secondaries

Several factors contribute to the compelling risk-return profile of secondaries investments:

Reduced blind pool risk: Unlike traditional private equity investments where performance is reliant on managers' historical track records remains theoretical, secondaries buyers can evaluate actual company performance, management effectiveness and value creation progress during due diligence.

Attractive entry points: Secondaries transactions are typically structured at discounts to book value (i.e., the cost of generating liquidity for an illiquid asset). They also often benefit from conservative sponsor valuations and timing advantages between pricing dates (generally the most recently available quarterly mark) and deal closure. This "record date lag" can create even more material effective discounts as portfolio companies continue growing during the transaction process.

Enhanced alignment: In GP-led transactions, sponsors typically invest significant capital alongside secondaries buyers, often representing 5-25% ownership compared to the typical 2-5% in traditional funds.²

Accelerated distributions: Secondaries funds generally deploy capital faster and distribute proceeds sooner than traditional private equity funds, reducing cash drag and improving overall returns.³

Diversification:The asset class offers significant diversification benefits through LP-led transactions that provide immediate exposure to mature fund positions and can fill gaps in vintage year exposure, while GP-led transactions offer access to curated portfolios across diversified fund managers and industries. This contrasts with traditional fund commitments that invest in new portfolio companies over approximately 5-year investment periods to achieve similar diversification.

Why private equity secondaries now

Undercapitalization, combined with the structural evolution of the market, creates what we view as a compelling entry point.

While the market has grown substantially, it remains undercapitalized relative to private markets broadly. Current dry powder sits at approximately 1.5 times annual volume, compared to over 2.0 times for traditional private equity, creating favorable supply-demand dynamics for buyers (see Figure 3). ⁵

Reduced exit activity is driving strong volume. Deal flow is not expected to slow when M&A markets rebound

The modern secondaries market has evolved beyond distressed selling. Today, sophisticated portfolio management and strategic asset optimization drive most activity. On the GP-led side of the market, a recent Churchill survey shows that 80% of private equity sponsors plan to maintain or increase their use of continuation vehicles even as market conditions improve (see Figure 4).

Access to high-quality assets during peak growth

While secondaries can accelerate portfolio establishment, the market now offers access to trophy assets that may no longer trade through traditional buyout processes. As sponsors hold their best-performing companies longer, secondaries may be the only way to access these high-quality assets during their peak growth phase.

A strategic allocation consideration

We believe the growth in private markets assets under management (forecasted to exceed $60 trillion by 2032)⁶ naturally provides an expanding supply of private equity secondaries opportunities, regardless of broader economic conditions. The combination of reduced blind pool risk, attractive entry points, enhanced alignment and accelerated distributions creates what we believe is a compelling case for including secondaries as a strategic component of private markets allocations.

To further help you evaluate if incorporating secondaries is appropriate for clients’ portfolios, explore our research paper Beyond the Basics: How Secondaries Can Enhance Client Investment Outcomes.

Differentiated access to the U.S. middle market

• With over $56 billion in committed capital and as one of the most active U.S. middle market lenders, Churchill provides customized financing solutions to private equity firms and their portfolio companies across the capital structure.^5,6 The firm has established relationships with more than 300 private equity firms and has over $20 billion committed to U.S. middle market private equity funds, equity co-investments and secondaries since 2011, with $2 billion or more in new commitments annually.^9,10