Poor Private Equity Returns Spawn Secondary Market

June 5, 2001 (PLANSPONSOR.com) - The decade-long bull run saw institutional investors making long term investments of vast amounts of money in private equity, money which is now spawning an increasingly liquid secondary market as increasing numbers attempt to sell off these holdings in uncertain times.

Once the most profitable investment vehicle, private equity returns headed south in the final quarter of 2000 as the new economy bubble burst, and institutional investors and pension funds are increasingly willing to sell their positions at discounts, starting at 15%, on the secondary market, according to Reuters.

Small But Growing

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The market for second-hand private equity is small, but growing. According to market research firm, Greenwich Associates:

  • in 2000, some $179 billion was committed to private equity, compared to $118 billion in 1999, and
  • the secondary portion of that was estimated to be $2.2 billion last year.

Wanting Out

In conjunction with falling returns, the development of the secondary market is also a result of the market decline, which saw the public investments of pension funds falling, and institutional investors redeeming their private equity investments in order to maintain set asset allocations.

Getting out of private equity funds isn’t always easy, since the stakes in private companies are purchased as long-term investments. These stakes are usually only sold after a number of years, locking up the money in funds for long periods of time. Usually the private equity firm decides whether an investment can be redeemed.