Joaquín Alexandre Ruiz, Head of Secondaries at the European Investment Fund, shares his expert insights on why the secondary investments market is booming, the evolving role of GP-led transactions, and how ESG and AI are shaping the private equity landscape. With over 15 years of experience and a track record spanning 60 transactions worth €1.3 billion, Joaquin offers a masterclass in navigating the complexities of today’s private markets.
Why are secondary investments gaining momentum in Europe and in the rest of the world today?
I think we need to look at where the secondary market was about 15 years ago. Just after the global financial crisis, the market was approximately $10 billion in volume across the world, Europe, US, and the rest of the world. And we expect the market to be at approximately $150 billion of transacted volume by the end of 2024. So that's 15 times what it was, more or less 14 to 15 years ago.
Why has this happened? Well, it has happened for a number of reasons. The secondaries market is no longer a last recourse for LPs to exit a position into a fund when, for example, they were in distress. That's how the market was born, let’s say, 25 years ago.
But today, the market is completely different. It's a market that is used as a portfolio management tool for limited partners, but also for general partners. I'll explain myself.
As an LP, today you would access the secondaries market if, for example, you have liquidity issues or if you are doing a so-called portfolio rebalancing. Let's imagine that you're invested in buyouts and venture and you have decided, for whatever reason, that you don't want to commit as much as you used to in venture. One of the ways to achieve this rebalancing is obviously to sell part of your venture portfolio in the secondaries market and eventually acquire more buyout funds through the secondaries market as well.
That could be a motivation that we see often in the market. It could also be a decision to focus on a fewer number of GPs as opposed to having maybe a hundred-plus relationships in the portfolio. On the GP side, what we see is that the market is being used in this moment by GPs to also generate liquidity for their existing investors.
This is why we have seen an increasing number of GP-led secondary transactions over the last six, seven, eight years. And especially in this market environment where we see negative cash flow—so exits have dried up. It's improving a little bit as we speak, but it's still a very depressed M&A environment. Therefore, GPs are using the secondaries market to sell trophy assets to continuation funds and, at the same time, to generate liquidity for their investors. All these together are reasons why the market is booming in terms of volume, and we have seen a lot of activity in the last two to three years.
And what's going to come next? Because this is a market that's been growing not only in Europe, but in the rest of the world, right?
I think that the volume in the secondary market is a factor of the volume in private markets. Let’s look at that from different perspectives.
If you try to see what is the size of the secondary market compared to private assets worldwide, guess what the percentage is? It's very low. It's actually one to two percent. It's nothing.
Can we believe that that percentage will grow to maybe three, four, five percent in the next decade? I think so. Could we see a secondary market that maybe by the end of the decade—let’s say 2030—is $500 billion in volume, so half a trillion? I think so. We will clearly see LPs accessing the markets, perhaps not because they have liquidity issues as distributions take speed again.
We will probably see LPs still accessing the markets, as I said, for portfolio rebalancing reasons. Maybe regulation. It could be new regulation that will complicate certain types of investors, banks, for example, to keep assets in private equity. They will have to sell. Insurance companies, pension funds. Especially in Europe, as you know, there is always a lot of regulation coming. So that might be a driver of the secondary market volume.
We will also see GPs, not only in buyouts but also in venture, private credit, infrastructure, and real estate, accessing the market through GP-led secondary transactions. All these elements make me think that the market will continue growing exponentially in the next few years. If you just look at how the market has grown in the last 15 years, kind of a 50 percent CAGR, we will probably continue seeing this CAGR going forward in the next five to 10 years.
And then what are the main challenges when you're identifying the right deals for secondary investments compared to other alternative investments?
I mean, compared to primaries, secondaries are a very competitive market. It's an M&A market. And as such, as a buyer, you need to compete for deals. Now, it's fair to say that there's a lot of deal flow. There's actually more deals than money available to invest through secondary deals.
What do I mean by that? In secondaries, we use a ratio called the capital overhang multiple, which basically looks at how much money is available as we speak and how much money is going to be raised in the next four months. That is divided by the transacted volume of the last year. That multiple has historically been between 1.5 and 2 times.
Which means what? It means that there is money to do secondary deals for the next 18 to 24 months. If you compare that with the buyout market, there is typically five to six years of available capital—so dry powder in the buyout market. Sufficient money to invest in the next five to six years.
So clearly, there's a big delta here. And there's a big delta here because, again, there is not sufficient volume to absorb the capital that is available. If you think about that, this is one of the reasons why I think that in the next five, six years—again, by the end of the decade—the market will probably be, as I said, half a trillion in volume.
Now, you need to think that besides how competitive the market is, in secondaries, I mean, it's a highly sophisticated market. If you want to be successful here as a buyer, as an investor, on the one hand, you need to be able to assess GPs. You need to have a network of GPs.
You also need to have a network of limited partners if you want to buy their stakes. It's true that it's a market that is heavily intermediated. Typically, a limited partner will speak to an advisor, so a boutique or investment bank, if they want to sell their portfolio. That’s what generally happens so that they can generate a competitive process and maximize price. But still, you need to have a network. You need to be able to assess a GP as if you were a primary fund investor.
But at the same time, you need to have similar skills as those of a direct investor so that you can assess the underlying assets and put a price. And this type of skill, this type of expertise, not a lot of people have it in the market. I always say to students—sometimes when I lecture in universities or business schools—and they ask, “What do you think we should do? Should we go into M&A, investment banking, consulting, or private equity? And in private equity, where should we go?” In the last few years, I've been saying, if there’s an industry you should try to tap into, it’s secondaries. Because this market will be huge in 10 years' time. And if you’re able to enter now, in 10 years, you will be one of the veterans in the industry. So go for it.
