Alternative Allocations: Private Equity—Secondaries Anyone?

In recent years, private equity fundraising surged, yet exits slowed drastically in 2022, prompting institutional investors to rebalance portfolios through increased secondaries activity. Franklin Templeton Institute’s Senior Strategist Tony Davidow explains.

Private equity: Secondaries anyone?

During the recent environment of easy money and growing demand, private equity (PE) fundraising grew rapidly over the last two decades. From 2011–2021, private equity generated 11 consecutive years of net distributions to limited partners (LP), meaning institutions could typically count on distributions offsetting commitments. However, as noted in our “2023 Private Market Outlook,” private equity exits slowed dramatically in 2022, and continue to be stalled as of the writing of this report.

Private equity valuations reset from their lofty 2021 valuations. Higher interest rates and tighter credit conditions should put pressure on PE valuations, and investors may need to brace for a down round. Private equity fundraising is down substantially from its 2021 peak.

US Private Equity Fundraising Activity

According to PitchBook,1 “Exit value hit an air pocket in Q3, falling 40.7% from the prior quarter to its lowest quarterly level since the global financial crisis—and is now down 83.7% from the Q2 2021 peak.”

Exit activity is arguably the most important link in the PE chain of capital formation and an indicator of the health of the overall PE market. Exits fuel fundraising which leads to increased dry powder and the investment of capital. Exits also impact the allocation/reallocation of capital across institutions.