Top Secondary Investment Trends with Keith Brittain
The secondary market has grown significantly over the last decade in terms of its size and presence in the private markets. As secondary market volume continues to increase, new trends across portfolio management and the secondary market are taking shape. We caught up with Keith Brittain, who was recently named Co-Head of Secondary Investments, to hear first-hand how the secondary market is evolving and where it may be headed next.
Q: What is your background and where is your focus?
A: After spending 12 years in consulting and investment banking, I am coming up on my 15th year anniversary at Hamilton Lane and, during that entire time, I have been on the Secondary team – sourcing, underwriting and negotiating secondary transactions. When I joined Hamilton Lane in early 2010, the secondary market was significantly smaller and relatively unknown. The market was around $10-20 billion in annual volume and consisted primarily of buying LP interests. The GP-led market didn’t really exist then. Fast forward to today, and there are many types of secondary transactions and many reasons why LPs and GPs use the secondary market. This year, secondary market volume is on pace to set a record, which was previously set in 2021 at around $135 billion.
Q: What stands out to you about the amount of growth over the last 10-15 years?
A: A number of things stand out. For one, the size of the overall private markets has grown tremendously. Today, there is about $9 trillion of net asset value in the private markets1, compared to less than $3 trillion 10 years ago. Hamilton Lane has talked a lot about the benefits of the private markets (the historical outperformance of private vs. public counterparts, private companies representing a significantly larger investable universe, etc.) and as investors seek to maximize the risk/return potential of their portfolios, many are increasing their allocation to private markets and many first-time investors/limited partners are also entering the industry. The $9 trillion of unrealized value today across the private markets is essentially the “inventory” of the secondary market, and the historical turnover rate of this inventory has only been about 1%-2% annually. Do we think that turnover rate could increase in the future as investors continue to navigate all the choices in the private markets? Indeed, we do.
The other aspect of the market that stands out is how much the secondary market has evolved. A secondary transaction 15 years ago essentially meant becoming a replacement limited partner in a fund. Today, transactions range from the traditional LP interest purchase to tender offers to GP-led continuation funds to preferred equity, and many other types of transactions. At Hamilton Lane, we have been at the forefront of this evolution, and it has been exciting to have a hand in shaping the industry.
Q: Where are you seeing opportunities today?
A: The opportunity set today has never been bigger. Our deal flow is larger than it has ever been and is up about 25% over last year. Over the past decade or so, secondary deal volume has grown at about a mid-teens CAGR. Although secondary buyers have been good at raising capital, we as an industry have not raised enough capital to keep up with the opportunity set. When we look at the dry powder within the secondary industry today, it is among one of the lowest levels I remember seeing in my career. Being in an industry with a supply/demand imbalance creates some very interesting buying opportunities where buyside competition for new investments is reduced.
Q: What other trends have you been observing in the secondary market?
A: One of the biggest topics across the industry is the lack of distributions coming back to LPs. Last year, distributions were 10% of net asset value. Between 2013-2021, distributions averaged about 25% of net asset value. This dynamic has created a strain on the LP universe because many private markets pacing models were based on historical cash flows during a time when the industry was more cash flow positive. Slowing distributions can lead to rebalancing portfolios, revisiting future pacing and a host of other issues that need to be addressed. The secondary market has been a beneficiary of slowing distributions as LPs can utilize it to increase and manage distributions, and GPs can use it as an exit path for portfolio companies and, thus, generate distributions for investors.
Longer term, we think having an active and deeper secondary market is beneficial to private markets investors. One of the historical drawbacks to private markets has been its lack of liquidity, so a mitigating factor will be the continued growth and development of the secondary market. As more investors enter the asset class, increase their private markets allocations and use the secondary market to manage their portfolios, we think there is a lot of growth potential ahead for the secondary market.
Q: What is on your radar for the secondary market in 2025?
A: Although there are many things on the radar, two are at the top of the list. One is that we will continue to focus on and invest in technology. We have data on over 22,000 funds and 160,000 private companies.2 Our tools to collate and analyze that data are unique, how we use technology to source and underwrite deals differentiates us in the market and how we proactively source transactions makes us stand out. We invest heavily in technology because we think it can help us make better and faster investment decisions.
Another major area of focus for us will be capitalizing on a growing opportunity set with a lack of buyside capital. We are a targeted buyer of funds and assets that we want to own and are not focused on being a macro/beta/index investor. There are a lot of ways to invest in the secondary market and we will keep doing what we have always done. Our strategy has worked well and our LPs have recognized that – as evidenced by our largest-ever fundraise earlier this year – and we are excited about what lies ahead in 2025.
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2As of June 30, 2024
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As of October 29, 2024