On the buy side, alternative investment managers are aiming to capitalize on what they see as a fertile investment opportunity. Blackstone Inc. is in the market with a fund to invest in the private equity secondary markets, said Jonathan D. Gray, president and chief operating officer, during Blackstone's Jan. 27 earnings call. The fund raised $13 billion in the fourth quarter "and is on track to reach approximately $20 billion, which would be the largest secondaries vehicle ever raised," Mr. Gray said.
"Secondaries had a record deployment quarter," Mr. Gray said. "Many institutions have seen an extraordinary performance from their private equity pools, and some are looking to make new allocations, but they're selling older funds and that's led to huge deal volume there."
Blackstone's real estate and private equity secondaries business achieved a 50% internal rate of return in 2021, which was "the best annual return in over a decade in secondaries," he said.
The secondary deal flow last year made it a good year to be a buyer, said Cari B. Lodge, managing director and head of secondaries at Commonfund Asset Management.
But not all of the potential portfolios put up for sale in 2021 were sold because there were more LP interests for sale than capital to buy them, Ms. Lodge said.
"Only the highest quality assets sold because there was such a supply of deals," she said.
Pension funds and other institutional investors were not the only investors selling limited partnership private equity interests in 2021, Ms. Lodge said.
Family offices, insurance companies, secondary funds and fund-of-funds managers sold LP interests. Secondaries and fund-of-fund managers used the secondary market to help them wind down their funds, she said.
Ms. Lodge said she thinks limited partnership secondary market transactions will continue to grow in 2022. One reason is that the combined value of the transactions on the secondary market is still a fraction of the $5.33 trillion in private equity assets under management in 2021, Preqin data shows.
And Preqin predicts that the total worldwide private equity AUM will grow at a faster annual rate than in the past. Preqin estimates that private equity AUM will reach $11.12 trillion in 2026, reflecting a 15.9% compound annual growth rate — faster than the 10.2% compound annual growth rate between 2010 and 2020.
Also motivating private equity limited partnership sales is that funds are extending well beyond their expected lifespans, industry experts said.
"What's happened is the model for liquidity has changed," said Stephanie Pindyck Costantino, a Princeton, N.J.-based partner at law firm Troutman Pepper Hamilton Sanders LLP.
The time horizon for private equity funds has gotten longer and the COVID-19 pandemic impacted that, she said. Investors' models did not account for the extended length of time, Ms. Costantino said.
Some institutional investors are choosing to sell limited partnership interests on the secondary market themselves, rather than participate in one of their manager's GP-led processes in which assets from the existing funds are sold to a brand new fund called a continuation fund, she said.