The Evolution of Secondary Investing

Secondary investing got its start in the 1980s, but it gained serious traction in the institutional world in the early 1990s, when several large institutional investors in exited the PE business via secondary sales. In 2000, when the tech bubble burst, many PE investors, especially families, found themselves overcommitted to PE and very short of capital as the markets crashed.

Then, in 2008, the shoe was on the other foot, as large institutional investors, especially colleges and universities, faced serious liquidity crises as a result of their overcommitments to PE and the collapse of the equity markets—the so-called “denominator effect.”¹⁰ Although the institutions' PE exposures had risen well above target, and although the equity markets had dropped precipitously, PE partnerships were still issuing capital calls. Strangely, many institutions had not performed cash flow analyses that incorporated these conditions, and they found themselves in serious hot water.

Most family investors—other than those who got in trouble in 2000—probably learned about secondary investing as a result of the institutional problems I just described. Nimble secondary funds were able to pick up a large number of LP interests very cheaply during this period, although the window of opportunity closed fairly quickly.