Private Equity Indigestion Relief Is Meant to Hurt
It’s commonplace now for investors to sell their stakes in buyout funds before the vehicle matures. But with better risk management, they shouldn’t need to.
Photographer: SeongJoon Cho/Bloomberg
Helping an investor cash out of a gummed-up buyout fund used to be a niche business. Now it’s mainstream. So-called secondary funds, which offer to buy unwanted private equity holdings, have become widely accepted. It would be a shame if normalization overshadowed one of the key reasons they have flourished — to remedy seemingly ill-disciplined investment in private markets during the era of easy money.
Secondaries enable existing private equity investors — or “limited partners” — to liquidate some or all of their holding in a fund. It’s a welcome service if that fund is struggling to return cash by selling its underlying investments. Secondaries can also take direct stakes in buyouts lacking decent exit options. The private equity manager then gets to achieve a partial gain and secures extra time to complete the buyout strategy.