Webinar Summary: Wealth Portfolios with Secondaries at Their Core

This webinar, hosted in partnership with Coller Capital, explores the changing role of secondaries in private markets portfolios for wealth investors. 

Here's the key talking points: 

Building a Private Markets Portfolio With Secondaries at the Core

Private markets investments are long-dated, often spanning five to ten years, and investors typically cannot trade their fund interests on an exchange. Secondaries address this structural illiquidity by providing an early exit option for existing holders of private markets positions. These transactions can involve limited partners selling fund interests or general partners seeking exits for underlying portfolio companies, and they can span private equity, private credit, and real assets.

The secondary market has expanded significantly. Global transaction volume reached around $220 billion last year, representing roughly 50% growth from the prior year, with activity split approximately 50/50 between LP-led and GP-led transactions. This growth sits against a much larger base of unrealized private markets assets, cited at about $14 trillion. As private markets assets continue to grow and age, and with muted IPO and M&A markets, the utility of secondaries increases.

In parallel, wealth investors and wealth managers have increased allocations to private markets. The approach has shifted from occasional, one-off investments toward more structured portfolio construction. Much of this capital has historically gone into primaries, but secondaries are increasingly being incorporated due to their distinct portfolio characteristics.

What secondaries are and how returns are generated

Secondaries involve buying interests in existing funds or portfolios, which can provide exposure to more seasoned assets and greater visibility into underlying company performance. A common feature is purchasing at a discount to stated value, reflecting the price of providing early liquidity to a seller. Discount capture can contribute to performance, but it is not the only driver.

A recurring emphasis is that the quality and growth potential of the underlying assets should be the primary driver of returns. Discounts can vary over time and may reflect transactional dynamics rather than asset impairment. Motivated sellers often operate under deadlines, and the buyer universe is not unlimited in a less transparent market. In such cases, a buyer able to execute within the required timeline may negotiate a discount even for high-quality assets.

For evergreen secondary strategies in particular, the split between value creation from discount at purchase and NAV growth after purchase becomes a key analytical lens. If most value creation comes from initial discount pickup rather than subsequent asset appreciation, the proposition can be less attractive for new investors entering an evergreen vehicle after early gains have already been realized.

Demand signals in wealth channels and platform flows

Observed allocation patterns show rotation in investor preferences across alternatives. Private equity has captured a larger share of inflows year-to-date, while private credit has seen a pullback in relative share. Real assets have been steadily gaining share, particularly infrastructure, and hedge funds have shown a resurgence in flows in the alternatives context.

Within private equity flows, secondaries have been a major component. Secondary subscriptions have been volatile across years, including periods driven by a small number of large funds, followed by broader participation. More recently, secondary flows have increased again, with record quarters cited and a growing number of funds contributing to overall volumes. On the same platform view, secondary flows have been predominantly equity-related strategies, with credit secondaries still representing a smaller portion.

How secondaries fit into portfolio construction

Secondaries have increasingly moved from being viewed as tactical or opportunistic to being treated as a permanent component in portfolio models. Several characteristics support this positioning. A commitment to a secondary fund can provide diversification across underlying funds, managers, vintages, and sectors, which can dampen volatility and broaden exposure quickly.

Because secondaries typically invest in more mature assets, they can reduce J-curve exposure, shorten duration, and improve cash flow characteristics through earlier distributions. They also reduce blind pool risk by providing greater visibility into the assets being acquired.

Secondaries can be positioned in portfolio construction in three specific functions. First, they act as a diversification engine by spreading exposure across vintages, sectors, and managers. Second, they serve as a pacing mechanism by accelerating distributions and reducing the J-curve effect, improving the overall cash flow profile. Third, they can function as a stabilization tool by increasing transparency, reducing blind pool risk, and improving early performance optics, which is often important in wealth contexts.

Secondaries can also be used to fill gaps in portfolios, such as missing vintage exposure or sector exposure, and to access specific managers. At the same time, portfolio construction requires attention to overlaps, especially when evergreen funds already include allocations to secondaries. Understanding underlying exposures and avoiding unintentional overweights becomes part of the advisor and selection process.

Why secondaries can be an effective entry point

When building a private markets portfolio from scratch using drawdown funds, achieving vintage diversification takes time because commitments are made over multiple years and capital is drawn gradually. Secondaries can accelerate diversification through a single commitment that provides exposure across multiple vintages, managers, and funds.

In evergreen structures, capital is typically invested immediately, which can make secondaries useful as an anchoring allocation that provides instant exposure and diversification. Even for investors with mature private markets portfolios, secondaries can remain relevant due to their different value drivers and cash flow profile relative to primaries.

What to look for in a secondaries manager

Evaluating a secondaries manager shares core elements with evaluating primary funds. Key considerations include repeatability of success, consistency of performance across time and cycles, and whether the same team responsible for the track record remains in place. Strategy drift matters, particularly if historical performance was generated under a different approach.

Alignment of interest is another central factor, including whether the manager invests in its own funds. Secondaries also have strategy-specific dynamics, such as performance often appearing strong early and tapering over time due to discount realization at purchase and subsequent averaging during the holding period. This pattern can be normal, but it can also be misused if early performance is emphasized without clarity on whether the deals align with the manager’s established approach.

Understanding return drivers

A recurring diligence requirement is to understand how returns are generated. Discount alone is not a sufficient indicator of investment quality, since assets can be purchased at a large discount and still be overpriced if fundamentals are weak. In contrast, a strategy that relies primarily on underlying asset appreciation requires confidence in asset quality and growth potential.

Leverage is another dimension that can affect risk and return. Due diligence focuses on how much performance is driven by leverage and how conservatively it is used. Layered leverage and structural complexity can make underwriting more difficult for LPs if not clearly understood. The key is to unpick the drivers of returns—discount pickup, NAV appreciation, and leverage usage—and assess whether those drivers are consistent with the manager’s historical approach and risk profile.

Valuations and governance

Valuation mechanics can be challenging in wealth contexts, including the distinction between reported NAV and market value, and the fact that valuations are backward-looking while underwriting is forward-looking. Verification can involve reviewing the manager’s valuation framework for consistency and transparency, assessing governance and independence through valuation committees and external auditors, and triangulating reported valuations against secondary market transaction pricing and broader market reference points where applicable.

A practical check cited is comparing the last reported valuation of an asset before exit with the realized exit valuation. A pattern of exiting at materially lower valuations than the last marks can be a red flag.

Concentration risk and GP-led deal exposure

Concentration risk can arise in certain secondary transactions, particularly GP-led deals where portfolios may contain only a handful of underlying companies. In addition, overlap across funds and across a client’s broader holdings can create unintended concentration. These risks reinforce the need for detailed exposure analysis, especially when secondaries are embedded within other evergreen offerings.

Why secondaries can fit evergreen structures

Evergreen structures introduce specific challenges. One is the mismatch between the liquidity offered by the structure and the illiquidity of underlying private market assets, requiring liquidity to service redemptions. Another is investment pressure: capital is already in the fund and needs to be deployed without excessive cash drag. A third is launch-year concentration risk, as many evergreen funds raise capital quickly in early years, leading to heavier exposure to current vintages.

Secondaries can address these challenges when the strategy emphasizes mature assets with visibility into distributions. Earlier and more predictable distributions can reduce the need for large cash buffers, helping manage liquidity needs. Large and consistent deal flow can reduce investment pressure by allowing managers to be selective rather than lowering underwriting standards to deploy capital. Finally, buying interests in older vintages can improve vintage diversification relative to primary-only deployment during a fund’s early fundraising years.

At the same time, evergreen structures remain an asset-liability management exercise. Even if secondaries can smooth the J-curve and improve cash flows, the underlying assets remain illiquid, and pricing discipline and manager selection remain critical.

Secondaries beyond private equity

Secondaries can be applied across asset classes, including private equity, private credit, and real assets. The role they play and the value drivers can differ by asset class. There is increasing prominence of credit secondaries and real assets secondaries alongside established private equity secondaries activity, with the reminder that return drivers and repricing dynamics vary across these segments.

Outlook

The outlook described is continued structural growth in secondaries, driven by the broader growth of private markets, longer holding periods, and increasing use of continuation vehicles. Secondaries are positioned as becoming a more integral part of the private markets ecosystem rather than a cyclical phenomenon.

In wealth portfolios, the focus increasingly shifts to how secondaries are used in context: distinguishing between stand-alone secondary exposure and secondary exposure embedded within evergreen funds, defining the role secondaries play in the overall allocation, and maintaining discipline in manager selection as competition and participation in the market expand.