The growth in secondaries is “both structural and cyclical”, according to Claire Madden, reflecting a maturing private markets ecosystem where liquidity solutions are becoming more sophisticated and more widely accepted as part of portfolio management. At the same time, it has clearly been accelerated by a period where traditional exit routes have been constrained.
What matters, she argues, is how secondaries are being used. “At their best, they allow investors to actively manage portfolios, rebalance exposures and access high-quality assets with greater visibility on value creation. But they are not a substitute for a well-functioning exit environment.”
Secondaries: tool, not solution
She describes secondaries as “an important tool rather than a solution in themselves”, stressing that the discipline remains the same: understanding asset quality, alignment and pricing, rather than relying on structure alone to solve liquidity challenges.
Turning to product innovation, Madden says much of what is currently being marketed is “less about innovation and more about distribution”. The industry has identified a large pool of retail and wealth capital and is working out how to package private markets in a way that fits it.
However, this creates a fundamental tension. Private markets are, by definition, long-term and illiquid. “That is not a flaw; it is part of how the asset class generates returns,” she notes. “Wrapping those assets in structures that imply regular or reliable liquidity does not change the underlying reality; it simply creates a mismatch.”
While these products can have a place for the right investors, with the right expectations and time horizons, Madden emphasises they “are not a universal solution, and they should not be presented as one”. In periods of stress, she adds, “liquidity is conditional, and often disappears precisely when it is most wanted”.
Distribution versus reality
As private markets expand into the wealth channel, there is a genuine investor need. Many clients are under-allocated and are seeking long-term sources of return and diversification beyond public markets which are “simultaneously over-priced, too concentrated, and volatile”.
But Madden is clear that the current “landgrab… is not borne out of altruism”. Instead, it reflects a challenging fundraising environment and a search for new pools of capital.
The risk, she warns, is that access is being expanded faster than suitability is being considered. Private markets require patience, tolerance for illiquidity and an understanding of how portfolios are constructed over time. Broadening access does not mean every structure is appropriate for every audience — “and that distinction is where the industry needs to remain disciplined, otherwise there are going to be some big problems down the line.”
Secondaries surge as private markets turn selective, Cammi shows
Valuations and structure
On valuations, Madden links the issue closely to fund structures. Assets held within traditional closed-end structures are generally valued on a conservative basis, as they are effectively a “carrying value, not the end game – that comes when an asset is sold.”
Private equity, she explains, is about value creation over a three to five year time period, and decisions taken to maximise exit value may temporarily depress profitability and therefore value. In a close ended fund this does not matter, as “everyone realises value at the same time when the assets are sold.”
By contrast, semi-liquid NAV funds introduce a conflict. Because investors can invest and redeem during investment windows, “valuations at any point in time take on huge significance”, particularly if performance fees are charged at redemption.
Madden also highlights the risks associated with the democratisation of private markets. Strong outcomes have historically been driven by “selectivity, long-term alignment and rigorous underwriting”, characteristics that are fundamental to how returns are generated.
As access broadens, there is a natural tension between maintaining that discipline and scaling product to meet demand. More capital, particularly if it is less experienced, can create pressure to deploy and to “manufacture capacity where it may not genuinely exist”, increasing the risk that standards begin to drift.
While democratisation is not inherently negative, Madden stresses it does not change the underlying requirements of the asset class. If anything, it increases the importance of manager discipline, transparency and alignment.
Liquidity stress test
Looking ahead to a potential liquidity shock, she expects pressure to emerge most clearly in semi-liquid structures. Valuations will be impacted, but in closed-ended structures, investors do not need to worry about the behaviour of other investors.
In semi-liquid structures, however, “everyone may head for the door at once and what was once thought of as a liquid structure turns out to be anything but.”
In such a scenario, managers may be forced to sell assets quickly, with “prize assets” put up for sale in a market where buyers are aware of the seller’s position and will price accordingly. Contagion is also a factor, Madden notes, pointing to recent stress in US semi-liquid credit funds where problems at one manager have led to increased redemptions across the market.
