Ava Mallin, Managing Director at Ardian, joined Keith Black, Managing Director of RIA Channel, to discuss the growth and benefits of secondary funds.
Ardian manages $177 billion in private equity, private credit, and real asset strategies. Since its inception, Ardian has raised capital from high-net-worth families and family offices. The firm has recently been building its team to focus on the private wealth market.
Ardian recently raised $30 billion for the world’s largest secondaries fund. This fund attracted 22% of capital from the private wealth market, double the 11% share in the prior fund. In the mid-2000s, the secondary market was approximately $10 billion. By 2024, volume in the secondary market exceeded $150 billion, with projections of exceeding $300 billion by 2030. As primary markets grow, the secondary market will naturally grow. Sophisticated institutional investors may need to sell funds into the secondary market due to the denominator effect, which causes their portfolios to become overweighted in private markets after a time of outperformance relative to publicly traded stock and bond markets.
Investors allocating to secondary funds can benefit from diversification across general partners, vintage year, asset size, and geography. In private equity, the J-curve describes the trend of low to negative returns in the first three years of a fund, followed by positive returns later in the life of the fund. Ardian often purchases secondaries in the third to fifth year of a fund’s life, mitigating the J-curve effect, as secondary investors do not pay the fees charged by the general partner before their purchase. Secondary investors also benefit from earlier exits, as investing in the fifth year shortens the time investors wait until receiving cash flows from the underlying private equity funds. Secondary funds can often purchase private equity funds at a discount to net asset value.
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