Podcast Summary: How Specialised Can the Secondaries Market Get?

Private Equity Spotlight – PEI Group
Air date: March 24, 2025
Host: Adam Ley
Guests:

• Nigel Dawn (Global Head of Private Capital Advisory, Evercore)
• Leor Landa (Head of Funds & Secondaries Practice, Davis Polk)
• Yan Robard (Managing Partner, Dawson Partners)

Episode Overview

This episode dives into the remarkable evolution and ongoing specialization of the private equity secondaries market. Host Adam Ley is joined by a trio of industry experts to discuss how new products, strategies, and structures are swiftly reshaping how LPs, GPs, and advisors operate. The panel unpacks the drivers behind explosive growth, the rise of niche and sector-specific funds, the advent of innovative vehicles like 40 Act funds, and how performance data and continued institutional acceptance will drive the decade ahead. The group offers insight into risks, regulatory trends, and what deeper specialization means for investors—balancing diversification and the quest for alpha.

Key Discussion Points & Insights

1. The Rise of Specialization in Secondaries

• Historical Perspective

  • The secondaries market has transformed from a generalist space to one of growing sophistication and specialization, both by asset class and deal type. (01:21)
  • "We've gone from, 20 years ago—even 10 years ago—when there was no specialization at all, to five years ago where there was a difference between GP and LP, to where we are today, with significant specialization by asset class, asset, and deal type." (Nigel, 01:43)

• Natural Market Evolution

  • Specialization is a response to the maturation, increased inefficiency, and larger capital inflows (02:08).
  • "The market...was pretty fragmented, very inefficient. Buyers picking off stock sellers that needed liquidity. As more capital and more talent has flooded the market...things have evolved to be more sophisticated and specialized." (Leor, 02:19)

• Explosion of Strategies

  • Innovations include single-asset continuation vehicles (CVs), infrastructure/real asset secondaries, private credit secondaries, NAV lending, preferred equity, and GP stakes (03:00).

2. Are All These Innovations Still ‘Secondaries’?

• Definitional Debate

  • All panelists agreed broader liquidity solutions like NAV lending and GP stakes logically fall under the ‘secondaries’ umbrella, as the underlying function is solving for liquidity across capital structures in private markets (04:44–06:47).

• The Vocabulary Problem

  • "We call it the secondaries market. It's really just sort of liquidity solutions, ways to provide liquidity. As the cost of capital has adjusted, it's opened up more opportunities..." (Leor, 06:07)

3. How Niche Can Specialization Get?

• Sector/Sub-Asset Class Focus

  • There’s an expectation of increasing granularity—sector-specific and even strategy-specific secondaries funds (08:47).
  • "It's natural that as the market gets bigger and more liquid, we'll see further specialization... For example, a fund just focused on software secondaries, or even more granular strategies within that." (Nigel, 09:17)

• Primary/Secondaries Parallel

  • "Secondary markets are just trailing 10-15 years behind that specialization in the primary markets... where the money is going is to specialized people who bring sector expertise, geographic expertise." (Leor, 10:48)

• Ten-Year Horizon

  • The next decade will focus more on capitalization and specialization, leveraging innovation that's already occurred (12:10).

4. Market Growth and LP Acceptance

• Size & Growth

  • The secondary market has quadrupled in the past decade (from $40 billion to $160 billion). Potential for further exponential growth is seen if sector and strategy benchmarks become well understood (04:00, 13:01).

• LP Resistance Easing, But Gradually

  • Acceptance has grown, but LPs, as fiduciaries, require more track record and transparency.
  • "The secondary market moves at the pace of LPs... The idea of a sponsor-to-sponsor deal was anathema. Now it's 50% of the market." (Nigel, 14:58)

5. Balancing Diversification and Specialization: The LP Dilemma

• Not a Binary Choice

  • Specialization isn’t crowding out diversified secondaries—there’s room for both broad-based and niche approaches (17:05).

  • "There will be a lot of allocation going to large diversified portfolios... But as secondaries becomes more granular, there will also be separate investment theses for specialized strategies." (Leor, 17:05)

• Investor Appetite

  • Many seek differentiated returns; as private markets grow, specialization represents a new potential source of alpha (18:44).

6. Advisory and Execution Trends

• Tailored Approaches
  • With enough depth among buyers, advisors now run dual processes for sector specialists and generalists, seeking the best “cost of capital” for each asset or sub-portfolio (20:08).

7. Innovative Vehicles & the Democratization of Secondaries

• 40 Act/Interval Funds

  • Viewed as innovations for broadening access and capital pools rather than primary examples of specialization (21:43–24:37).
  • "This is sort of the democratization of private markets; individuals can start with a small investment and access private markets." (Nigel, 23:01)

• Impact on Access & Liquidity

  • These vehicles have reduced friction, enabled easier access for high-net-worth and retail investors, and contributed to lowering the cost of capital.

8. Returns & Track Record Development

• Continuation Funds

  • Early data suggests returns from continuation vehicles are on par with co-investment portfolios but with lower volatility (26:14).
  • "Performance is largely uncrystallized. However... the multiple on a portfolio of continuation funds is going to be somewhat similar to a buyout portfolio but without the volatility of returns." (Nigel, 26:14)

• Market Undercapitalization

  • Secondary capital raised lags capital deployed ($500B deployed vs. $325B raised since 2021), signaling room for further return potential and growth (27:27–28:44).
  • "When an industry is undercapitalized, generally speaking, better assets come to market, and you've got a better opportunity to generate alpha." (Yan, 28:44)

9. Legal and Regulatory Risks

• Complexity and Conflict
  • CV and GP-led deals remain complicated, requiring expert advisory due to conflicts and regulatory scrutiny (31:11).
  • "The SEC pulled me aside and said, 'Leor, we just think secondaries, and especially GP-led, are the most interesting thing in the market right now.' ... These are complicated deals, but there's a mature set of advisors now to guide through the risks." (Leor, 31:23)

10. Commoditization vs. Innovation

• Standardization Will Come, But Bespoke Needs Remain

  • Market structure may eventually become more standardized—removing “friction” and enabling higher volumes (35:43–37:06).
  • But innovation persists; as one area commoditizes, new frontiers (like NAV financing, succession planning at GPs, and others) emerge (37:20–38:30).

• Natural Market Dynamics

  • "One of the byproducts of commoditization is lower returns... As that happens, there will be scale players on commoditized products and innovators seeking new alpha in more specialized areas." (Leor, 39:27)

11. 2025 Outlook & Market Optimism

• Market Sentiment

  • The market enters 2025 with high optimism, after a tough period for private equity, supported by increased distributions, capital calls, and strong activity across LP and GP segments (39:55–42:54).
  • "We're entering 2025 with renewed optimism. The necessary ingredients are there for an interesting 2025." (Yan, 39:55)

• Flywheel of Success

  • “Good pricing generates more activity, activity generates good pricing... we're on a flywheel of success heading towards a $200 billion year.” (Nigel, 41:50)

• Healthy, Broad Market

  • Compared to previous years, activity is occurring across more deal types, strategies, and investor profiles (43:01).

Notable Quotes & Memorable Moments

1. On Specialization:

   • "Where we are today—significant specialization by asset class and by deal type...meaningful evolution over the last few years." (Nigel, 01:43)

2. On the Evolution of the Market:

   • “This is the fastest pace of innovation I’ve seen in any market anywhere.” (Leor, 07:58)

3. On Innovation vs. Incumbency:

   • “The big get bigger, the small get really specialized, and the undifferentiated have a big problem.” (Nigel, 10:23)

4. LP Acceptance Changing:

   • “A sponsor-to-sponsor deal was anathema... now it's 50% of the market. That took a long time for acceptance.” (Nigel, 14:58)

5. On the Potential Market Size:

   • “I kind of go on this vision around the secondary market hitting a trillion dollars by 2031...” (Yan, 33:38)

6. On Democratization:

   • “This is sort of the democratization of private markets...reducing complexity allows individuals to access private markets where that was not an opportunity before.” (Nigel, 23:01)

7. On Returns and Commoditization:

   • “As one part commoditizes, innovation and evolution will focus on more specialized needs...this is the never-ending story of the secondary market.” (Yan, 38:30)

8. On Market Optimism:

   • “We're entering 2025 with a spring in the step...a different level of optimism...the fluidity in the market has come back.” (Yan, 40:35)

9. On Market Health:

   • “It’s a very robust market. We are seeing every type of deal across different industries.” (Leor, 43:01)

10. Potential Title:

    • “That should be the title of this podcast: Flywheel of Success.” (Yan & Nigel, 42:54–42:58)

Timestamps for Key Segments

• [01:21] – Panelist introductions & reflections on sector evolution
• [04:44] – Debate on what counts as a secondary strategy
• [08:47] – Discussion on how niche specialization can become
• [17:05] – Addressing the LP perspective on diversification vs. concentration
• [20:08] – How advisors approach specialized vs. generalist portfolios
• [21:43] – 40 Act funds and fund structure innovation
• [26:14] – Data and evidence on returns in new secondaries strategies
• [31:23] – Legal and regulatory risk overview for LPs in CVs
• [35:43] – Explaining market growth and friction reduction
• [39:55] – 2025 market optimism and “flywheel of success” sentiment
• [42:54] – Panelists’ predictions for annual market size and optimism

Conclusion

This episode paints a vivid picture of a private equity secondaries market at the edge of its “decade of specialization.” Key takeaways are that explosive innovation is feeding further segmentation, but robust growth will need continued track record-building and capital inflows. Panelists are united in their optimism for 2025 and beyond, foreseeing a market that not only grows in overall size but also in depth, options, and sophistication for all participants. The market may be at only 2% penetration now, but structural and cultural trends point to an era marked by both scale and specialized opportunity—offering both LPs and GPs new horizons for liquidity, returns, and strategic evolution.