Secondaries under scrutiny: layer cake or traffic jam?

Private market secondaries are booming – but are they creating a welcome 'layer cake' of liquidity solutions, or a 'traffic jam' that postpones real exits? We explored this question in bfinance's inaugural Allocator Briefing podcast, with four of our senior researchers unpacking what's driving today's surge, where mispricing and misalignment can creep in, and what investors should watch out for.

bfinance insight from:

Kathryn Saklatvala, bfinance Advisor, was joined by Anna Morrison (Head of Private Equity), Thibault Sandret (Head of Private Debt), Anish Butani (Head of Infrastructure) and Ishan Issadeen (Head of Real Estate) to explore exits, product innovation and manager consolidation.

For the full version of The Allocator Briefing see here.

Challenging exit and performance backdrop

A weak exit environment has become the defining backdrop for private markets. Slower deal activity and wider valuation gaps are stretching holding periods, compressing performance, and intensifying the demand for liquidity tools – fuel for the growth in secondaries. But greater activity doesn't automatically mean better outcomes: investors still need to interrogate fairness, pricing, governance and the true motivations behind a transaction – especially in GP-led deals that can blur the line between an 'exit' and an 'extension'.

Anna Morrison: "It has been three or four pretty weak years in private equity. Whether they be geopolitical events, inflation, higher-for-longer interest rates, all these factors have kept the gap wide between buyer and seller expectations. So, what that means is we've seen much longer holding periods for assets and that of course flows through to performance and also will ultimately flow through to more compressed IRRs. In the last couple of years, private equity distributions have nearly halved, and this is what everyone's referring to when they talk about the liquidity crisis in the market."

Private credit has felt the same exit drag – because much of direct lending ultimately depends on sponsor-led refinancings and exits. But the mechanics differ: floating coupons can offset slower cash realisation, and deal terms can evolve when maturity dates loom.

Thibault Sandret: "We have seen longer periods of time needed for private debt funds to reach DPI breakdown. This is more than offset by higher rates, meaning higher coupons on loans that remain outstanding. We've seen a little bit of amend and extend activity, which should not be taken for granted. You're getting close to the original maturity date, and because of the private equity exit environment, the borrower is not in a position to repay back the loan, but as a direct lender, you are usually able to pick up additional economics."

The industry challenges haven't, however, interrupted an improving trajectory for secondaries standards.

Anna Morrison: "Historically GP-led transactions have lacked a degree of transparency and consistency, and some of the terms have been a little too GP friendly, which we've seen manifest in a few ways, often through the valuation date. I recall one US investor who'd seen over 40 different continuation vehicle options, and the worst involved a year-old asset the GP wanted to put into a continuation vehicle. There are many really good players however it's always a case of taking your GP to task if something doesn't look like it's sufficiently equitable."

Rapidly evolving secondaries product landscape

Investor choice has expanded rapidly – from traditional closed-end LP-led funds to more specialised GP-led approaches, plus newer structures designed to broaden the buyer base. This proliferation is part opportunity (more entry points, potentially better portfolio construction) and part risk (greater structural complexity, more conflicts to manage, and more dispersion in quality). The bfinance team has a consistent message: understand what you're buying – strategy, structure, liquidity terms and valuation discipline – and look beyond the 'secondaries' label.

Anna Morrison: "There's a growing range of options. The sector started with closed-end funds, which largely invested in LP-led deals. It then transitioned to a mix of LP- and GP-led investments to add additional alpha. We've since seen a shift to dedicated GP-led only funds, offered by large primary fund managers, in many cases focused on single assets."

Infrastructure provides a clear example of how product innovation can result in conflicts in the case of semi-liquid and evergreen vehicles marketed to private wealth investors. Secondaries can speed deployment and reduce the classic J-curve, but they can also be used to manufacture early performance that may not be repeatable.

Anish Butani: "We've seen a huge surge in the infrastructure space in the past couple of years. Secondaries are proving to have a very important role to play in portfolio construction because they aid the speed of deployment. However, from a marketing perspective, investors in semi-liquids should be wary about the 'N-curve', in other words rapid performance before moderation."

More broadly, real estate shows what happens when liquidity constraints collide with valuation uncertainty. With reported NAVs lagging reality, redemption queues have been prolonged, and seemingly attractive discounts in real estate secondary markets have been met with scepticism.

Ishan Issadeen: "Valuations are one of the issues which has kept managers in a prolonged redemption queue situation — there seems to be some reluctance to mark down assets to where you could say they should be. This issue, in combination with lower transaction volumes, also explains why real estate secondaries have traded at a bigger discount versus other asset classes — market participants do not believe the reported NAV is an accurate reflection of reality."

Secondaries managers amid industry consolidation

As secondaries becomes a core capability – both as a strategy and as a liquidity tool – manager platforms are reshaping fast. Consolidation can bring scale, distribution and cross-asset reach, but it also raises new questions about incentives, team stability and conflicts across a growing product shelf. This is a practical due diligence issue: investors shouldn't assume that a bigger platform automatically equals better alignment.

Anna Morrison: "Given the strong demand for the asset class within a broader private market platform, we're seeing fewer secondary boutiques than we had historically. A secondaries capability has become a 'must-have' for private market companies as they grow their platforms in a fast-consolidating market."

This raises some challenges, particularly around people risk and shifting internal power dynamics, that can be easy to miss if performance is stable on the surface.

Ishan Issadeen: "There has been a lot of change going on, people leaving, corporate acquisitions — even a strategy which looks like it's been investing through the cycle may have underlying factors which investors also need to consider when they're underwriting these funds."

For the full version of The Allocator Briefing see here.

Glossary

• Amend and extend: Renegotiating a loan's terms to extend maturity, often in exchange for additional economics to lenders.
• Continuation vehicle: A new fund structure that 'continues' ownership of one or more assets, typically moving them from an older fund into a new vehicle.
• DPI (distributions to paid-in) breakdown: When cash returned to investors matches their initial investment.
• Direct lending: Private loans (often to sponsor-backed companies) originated by non-bank lenders.
• Evergreen / open-ended: A fund structure with no fixed end date; investors may subscribe/redeem based on fund terms.
• Floating coupons: Interest payments that reset based on a reference rate, meaning income can rise or fall as rates change.
• GP-led: The general partner (GP) initiates a transaction (often to provide liquidity or extend ownership of assets).
• IRR (internal rate of return): A time-weighted measure of investment performance commonly used in private markets.
• J-curve: Early negative returns often seen in private funds due to fees and delayed value creation.
• LP-led: A limited partner (LP) sells an existing fund interest to a new buyer.
• NAV (net asset value): The reported value of a fund's assets minus liabilities; used as a reference point for pricing secondary transactions.
• Redemption queue: A backlog of investor redemption requests in an open-ended fund when liquidity is constrained.
• Secondaries: Buying and selling existing interests in private market funds or assets (rather than investing at launch).
• Semi-liquid: A structure offering periodic (but limited) redemption features — more liquid than classic closed-end funds, less liquid than daily-traded assets.
• Sponsor-led refinancing: When a private equity sponsor proactively restructures or refinances a portfolio company's debt.