The surge in interest is one reason Eaton Partners, a fundraiser for alternative funds, decided to hire a new team focused squarely on secondaries sales, says Jeffrey Eaton, partner at the firm.
“I believe that LPs are going to more frequently get in and out of positions,” he says. “We expect that demand to continue.”
Various institutional investors that previously only invested in primary funds have since expressed interest in participating in the secondaries market, Eaton adds.
But building that participation could be a challenge, Eaton says. While the idea might work in theory, a big reason that Eaton Partners saw opportunity in the secondaries market is that many limited partners prefer to be discreet about their private equity portfolios and remain reluctant to publicize their interest in selling stakes.
“Sometimes, they want to keep it quiet, and for that reason alone, I can see off-exchange transactions continuing to take place,” he says.
Another complicating factor for a trading platform is that most secondary deals are highly structured and unique, Eaton says.
“These are often quite similar to investing in a primary fund,” he says. “Few of them would do that without having a conversation with the manager of that portfolio. And in most secondary transactions, the [general partner] has ultimate authority over whether a transaction can happen.”
Eaton says another snag is the potential that investors will have to weed through a marketplace to find out which sellers are interested in a deal and which are just seeking to value stakes, a common issue secondaries brokers manage for limited partner clients.
“The buyers would want to do deep due diligence on the seller,” he says. “It’s not to say it can’t be done on an exchange, but you need the ability to manage the process. There has to be some way for the exchange to give buyers confidence that the offers out there are real offers.”
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