A number of large, multi-platform asset managers in Europe have recognized that private equity secondaries present a fast-growing, profitable opportunity to create an additional revenue stream, according to a recent report.

“This extra revenue stream can be leveraged via the same relationships and distribution networks that managers tap for their primary investing fundraising, and it provides clients with more a more comprehensive product offering in private markets,” says Justina Deveikyte, director of European institutional research, at Cerulli Associates, which published the report.

One of the main factors driving the number of managers with dedicated secondary investment programmes in 2021, the report notes, is the continued rise in assets under management of private assets and the related liquidity needs as investors seek to generate superior risk-adjusted returns.

As more investors invest in private markets, the opportunity set of secondary buyers – primarily liquidity before a fund’s liquidation via trade sales and initial public offerings – increases, prompting more private asset managers to enter the market.

Several managers that have historically raised capital for buyout funds have now entered the secondary market. Also, many secondary market practitioners left established firms to set up their own operations.

Both limited partner buyers and sellers, according to Cerulli, are moving to secondaries to mitigate the J-curve and regulatory concerns, whereas general partner-led deals are being driven by the search for liquidity in high-performing assets and alternatives to traditional exit routes.

“It is also important to factor in the increasing sophistication of many institutional investors, who recognize the benefits of secondaries in portfolio construction to put money to work faster and mitigate the J-curve,” Deveikyte points out. “Strong deal flow activity in the first half of 2021 has resulted in a decrease in available dry powder to transact on deals.”