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Secondary Private Equity Funds: The Perfect Storm

By Hope Vaughn and Ross Barrett
April 01, 2003

The recent growth and maturity of the private equity market has generated significant secondary market opportunities. In a maturing private equity industry, the secondary market has become increasingly viewed as a tool for private equity portfolio management and a source of liquidity, in a relatively illiquid market.

Historically, approximately 2-3% of all private equity commitments turn over in the secondary market. Over $860 billion of private equity was raised from 1997-2002 (VentureEconomics). Based on this data, Landmark Partners, a dedicated secondary investor, estimates the volume of secondary activity generated from these commitments to approach $22 billion or approximately $2 billion annually over the next decade.

Secondary funds have currently raised nearly $14 billion to buy existing primary investments in private equity funds and direct company investments. Transaction projections, compiled by Colu- mbia Strategy, LLC, estimate that between $6 to $16 billion of secondary deals will be completed by 2006. This “dry powder” represents both opportunities and challenges for buyer and seller alike. This article outlines the unique forces driving the current secondary market and the associated transactional risks and opportunities it presents to the private equity industry.

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