Sunflower Field

An environment of few IPOs and low M&A activity can create a buyer’s paradise for secondary market funds as private equity investors look for liquidity options.

Secondaries deal volume1 continues its rapid growth this year. Following a 45% increase to $162 billion in 2024, the volume continued on the same trajectory in the first quarter of 2025, rising from $32 billion in 1Q24 to an estimated $50-65 billion in 1Q25.2 The full-year volume for 2025 is expected to exceed $185 billion (Exhibit 1). Limited partners (LPs) are again the primary source of secondary offerings as they seek liquidity in a sluggish deal market.

Exhibit 1: After a strong 2024, secondaries deal volume continues to grow
$ billions
Exhibit 1: After a strong 2024, secondaries deal volume continues to grow

As of 01/25. Source: Jefferies Global Secondary Market Review. Data may not foote due to rounding.

Cash flow pressures are motivating sellers

Three trends are prompting liquidity needs: 

1. Capital calls: LP capital calls have outpaced distributions for 18 straight months as of 2Q24,3 forcing LPs to generate cash flow through the sale of their stakes. 

2. Self-funding erosion: The ability of private equity programs to provide continuous liquidity to fund new investments has diminished, leading them to sell stakes to invest in alternative funds. 

3. Heightened uncertainty: Macroeconomic challenges—such as Liberation Day, “closed” M&A and IPO markets, and ongoing geopolitical disputes—have compounded liquidity needs, prompting sellers to increase cash flows. 

Why do investors sell? Private equity investors sell their fund interests through secondary transactions for variety of strategic and tactical reasons. Common motivations include portfolio rebalancing, liquidity needs, and regulatory or capital constraints. They may want to reduce exposure to certain managers, strategies, or geographies. Some investors also sell in order to simplify their portfolios, manage vintage-year concentrations, or take advantage of favorable market pricing. Sometimes, other factors may motivate sellers. For example, recent headlines have noted a surge in selling by universities as they seek capital to offset lost research grants and to prepare for a scenario where they could lose their non-taxable status. These funding deficits have increased the need for more liquidity from their endowments to bridge the gap. However, the fact that sellers are motivated does not mean assets are “on sale.” Many university endowments are highly knowledgeable about the worth of their assets, so even as the volume of transactions increases, pricing and discounts may not be more favorable. 

While university endowments have ramped up selling this year, endowment and foundation (E&F) activity is still a small percentage of the market. Pensions and sovereign wealth funds (SWFs) comprised the largest proportion of the LP market last year, which is not surprising (Exhibit 2). However, what was noteworthy was that 40% of LPs were firsttime sellers.4

Exhibit 2: A diverse set of sellers led by pensions/SWFs
Exhibit 2: A diverse set of sellers led by pensions/SWFs

As of 01/25. Source: Jefferies Global Secondary Market Review.

What could spur continued LP sales activity?

Two other factors may influence deal volumes for the foreseeable future. 

A rollback in regulatory policies under the current administration is expected to stimulate broader private equity activity. While investors wait to see the effects of deregulation, the macroeconomic uncertainty and lack of distributions generated from their portfolios continue to dominate their focus. 

Additionally, the democratization of private equity, which will open access to retail investors, has the potential to boost market activity. As individual participation increases, we expect not only greater investment inflows but also more frequent selling, which could further fuel growth in the secondary market.

Uncertainty creates opportunities for secondaries

Contrary to what some believe, market participants continue to engage in transactions, such as mergers and acquisitions, even during challenging economic periods. However, during times of uncertainty, rather than outright downturns, the market struggles to adjust. This ambiguity can cause participants to pause, delaying decisions as they wait for greater clarity. At the same time, a lack of visibility often drives more sellers to the secondary market, creating a wealth of potential opportunities. For secondary buyers, this environment allows for greater selectivity—making it a true buyer’s paradise.

 

A note about risk 

General risks to consider 

Secondary investments: The ability of the manager to select and manage successful investment opportunities, underlying fund risks; these are non-controlling investments, no established market for secondaries, identify sufficient investment opportunities, and general economic conditions. 

Primary investment: Identify sufficient investment opportunities, blind pool, the manager’s ability to select and manage successful investment opportunities, the ability of a private equity fund to liquidate its investments, diversification, and general economic conditions. 

Venture Capital: Characterized by a higher risk and a small number of outsize successes, has the most volatile risk/reward profile of the private equity asset class. 

Growth Equity: These companies typically maintain positive cash flow and therefore present a more stable risk/ reward profile. 

Mezzanine Financing: Has the most repayment risk if the borrower files for bankruptcy and in return, mezzanine debt generally pays a higher interest rate. 

Leveraged Buyout: Generally exited through an initial IPO, a sales to a strategic rival or another private equity fund, or through a debt-financing special dividend, called a dividend recapitalization. 

Distressed Buyout: Offer the opportunity to invest in debt securities that trade at discounted or distressed levels with the potential for higher future value if the company recovers. 

General private equity risks: Private equity investments are subject to various risks. These risks are generally related to: (i) the ability of the manager to select and manage successful investment opportunities; (ii) the quality of the management of each company in which a private equity fund invests; (iii) the ability of a private equity fund to liquidate its investments; and (iv) general economic conditions. Private equity funds that focus on buyouts have generally been dependent on the availability of debt or equity financing to fund the acquisitions of their investments. Depending on market conditions, however, the availability of such financing may be reduced dramatically, limiting the ability of such private equity funds to obtain the required financing or reducing their expected rate of return. Securities or private equity funds, as well as the portfolio companies these funds invest in, tend to be more illiquid, and highly speculative.

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1 Source for total deal volume: Jefferies Global Secondary Market Review (Jan 2025). Source for 1Q24 deal volume: PEI–Barings on Financing the Secondaries Surge, November 2024. Source for 1Q25 deal volume: Initial 1Q25 Evercore PCA estimate. 

2 1Q24 source: PEI Article–Barings on Financing the Secondaries Surge, November 2024. 1Q25 source: Initial 1Q25 Evercore PCA estimate.

3 As of 07/24/24. Source: Pitchbook, “Liquidity hunt drives record high in secondary market deal value in 1H 2024.”

4 As of 01/25. Source: Jefferies – Global Secondary Market Review, January 2025 report.

 

This document does not constitute investment advice or an offer to buy or sell any security. Investing in private equity involved a considerable amount of risk, including that an investor’s commitment may be lost. There can be no guarantee that an investment in private equity will be profitable. Sources used in preparation of this document are not intended to be a complete representation of past, current, or future activity nor does Pomona guarantee the accuracy or completeness of such third-party sources. Actual results, performance, or events may differ materially due to, without limitation, general economic conditions, performance of financial markets, interest rate levels, increasing levels of loan defaults, changes in laws and regulations, and changes in the policies of governments and/or regulatory authorities. 

Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain statements contained herein may represent future expectations or other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. 

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