These funds are real forced sellers of primary private equity commitments, he says. “We’re talking about city pension funds that are underfunded. If you look out another 15 years and ask if they can meet their pension obligations, there is no way, no how.” In contrast, strong cash flows into super funds mean their liquidity problems are more manageable. “Nine per cent is quite a number,” Penn says, “and some super funds have younger demographics and are positioned to grow much faster.” The secondaries market is also being driven by the need for private equity managers to extend the life of investment programs, beyond their typical 10 to 12 years, amid challenging business and exit environments, Penn says.

“The J-curve has stretched out, which puts investors in a position to say, ‘I’m now at year nine or 10 and my assets are returning one-and-a-half times – it may be time for me to get liquidity by selling my interest in the secondary market’,” Penn says. This can be appealing for investors aiming to reduce their exposures to unlisted assets after the liquidity scares of the financial crisis, says Ralph Suters, executive director at Quentin Ayers. “Liquidity is really affecting the way trustees behave right now. They’re being overly cautious in making new investments and they’re trying to seek ways to cash out their existing investments,” Suters says. Eugene Snyman, managing director of Cambridge Associates in Australia, adds that investors may not require immediate liquidity but have “very cumbersome portfolios” of private equity assets, and that “secondaries provide a good way to relieve some of the administrative burden of non-core positions in your portfolio”.

However, this impact will be marginal if secondaries account for a small portion of an investor’s private equity exposure, says Nicole Connolly, head of alternatives in the Russell Investments consulting team. “Secondary managers have a drawdown period of three to five years, which means you’ve got a small proportion of your program that is likely to return early funds,” Connolly says. In the first 18 months of the global financial crisis, secondaries managers believed that many attractively priced assets would come their way from cashstrapped investors. However, plenty of deals were offered to the market but few were struck because sellers found the steep discounts to the net asset valuations (NAVs) of their assets unpalatable. Michael Weaver, portfolio manager of private equity investments at Sunsuper, says this shows that the belief that investors would prioritise liquidity over sale price is a “myth”.