Managers had long believed it would make sense for large investors in alternative investments to use the secondary market to manage their portfolios and dispose of unwanted interests in funds. It did not become a potentially viable business until the Great Recession prompted sales of interests in alternative asset classes other than private equity.
Now, managers are moving into the market, anticipating potential inventory from the surge in real asset funds raised in the past few years.
Among the firms that have moved beyond private equity, adding capabilities to invest in the secondary markets of other asset classes are Ardian, HarbourVest Partners LLC, Landmark Partners, Pantheon Ventures, Partners Group AG, Neuberger Berman Group LLC and Macquarie Group.
Also, with last year's acquisition of $2.6 billion global real estate funds-of-funds manager Metropolitan Real Estate Equity Management LLC, The Carlyle Group now has added investment in the real estate secondary markets to its private equity secondary market and funds-of-funds business, AlpInvest Partners.
And, Blackstone Group in August acquired Credit Suisse's $10 billion private equity secondary market funds-of-funds subsidiary, Strategic Partners, which also invests in real estate.
Putting its strategy into action, last September Ardian, the AXA Group spinout formerly known as AXA Private Equity bought a 9.9% share of F2i SGR, an Italian infrastructure fund, from Merrill Lynch for e150 million ($205 million).
HarbourVest is expanding beyond private equity into real assets secondaries, said Brett Gordon, Boston-based managing director. HarbourVest has more than $30 billion in total AUM.
“We believe the real asset secondaries is an exciting space,” Mr. Gordon said in an interview.
There is a great deal of money being raised on the primary side for funds in the asset class including real estate, infrastructure, energy and timber. Plus, there are a growing number of sellers but not as many buyers as in the private equity secondary market, he said.
“In private equity, if an agent is selling a limited partnership interest or a portfolio of limited partnership interests, it is easy to come up with 50 to 60 people to talk to,” Mr. Gordon said. “In infrastructure, energy, timber and real estate, there are fewer than a dozen credible buyers.”
Pantheon was an early mover into the infrastructure secondary market, said Kathryn Leaf Wilmes, partner and head of infrastructure. The firm started pursuing infrastructure secondaries in 2008, but the market opportunity didn't really begin to open up until 2010, she added.
Now, Pantheon is expanding into other real assets such as natural resources, timber and agriculture, Ms. Leaf Wilmes said.
“As real-asset fundraising explodes, the secondary opportunity is not far behind,” she said.
Laurence G. Allen, managing member of secondary market brokerage firm NYPPEX LLC., Rye Brook, N.Y., in an e-mail said: “We are seeing high secondary transaction volumes in real estate funds, followed by energy, infrastructure, then the lowest volumes in timber funds. In particular, there is a lot of secondary demand in 2014 for real estate and infrastructure funds, as institutions want to add these "stable cash flow' funds and are willing to forgo some capital appreciation from venture, etc.”
Indeed, institutional investors also are starting to sell limited partnership interests in other asset classes along with their interests in private equity funds.
In November, the $40.8 billion Teachers' Retirement System of the State of Illinois, Springfield, put about $500 million in private equity and real estate fund interests in limited partnerships up for sale. In an e-mail, David Urbanek, director of communications for Illinois Teachers, declined comment.