Secondary operations: A strategic tool for fund continuity

Secondary operations, which are the subject of this article, are mainly those by means of which a venture capital manager promotes the constitution of a new investment fund ( called continuation fund), which will acquire one or several assets already under its management in another of their funds, but from which they  wish not to divest given its value and their evolution potential. The main goal of these transactions, therefore, is to provide the continuity, and in some cases to increase the capital, to those companies within a fund´s portfolio that can continue to develop and grow, but in which investors lack the capacity to retain their investment or to disburse additional capital. 

Secondary transactions in the alternative investment fund sector have matured significantly in recent years, evolving from a niche strategy to an essential tool in fund managers' portfolio management. As a result, we see that these transactions have experienced notable growth in recent years, reaching a total amount of 155 billion dollars in 2024, a record to date. This growth is expected to continue in the short to medium term, with estimates pointing to a total of 175 billion dollars in 2025. This surge is driven by various factors that are transforming the way fund managers and investors approach these strategies, notably the sophistication of market participants.

Some of the main reasons behind the significant increase in secondary transactions are the liquidity shortage currently being experienced in global markets and the slowdown in traditional divestment channels, such as mergers and acquisitions (M&A) and initial public offerings (IPOs). We find ourselves in an environment of constant uncertainty, characterised by market volatility, ongoing inflation and recurring geopolitical changes, which has made it increasingly difficult to accurately value the assets that make up portfolios.

This situation has led alternative investment fund managers to explore alternative methods, as they believe that in these macroeconomic conditions it is not appropriate to sell these assets prematurely and that it is important to provide stability to companies in order to achieve their objectives. Therefore, given that achieving the above generally requires more time and capital than the fund in question has available at that moment, and that managers must meet the liquidity needs of their existing investors, they resort to secondary market transactions as an alternative to unlock liquidity without the need for complete divestment. These transactions enable them to optimise the potential of their assets, improve their distributions to Paid-In (DPI) ratios and, at the same time, maintain control over the expansion of their portfolios.

Likewise, these transactions enable managers to rebalance their portfolios in line with changing market conditions, attract new investors by offering mature, lower-risk assets at attractive prices, consolidate the variable management fee (carried interest) of the existing fund (although it is generally reinvested in the new continuation vehicle) and restart the distribution waterfall, thereby generating additional value for all stakeholders.

From an investor’s perspective, there is also growing interest in these transactions. Investors seek liquidity to rebalance their investments and meet strategic objectives. On the one hand, existing investors who wish to maintain their exposure are offered the opportunity to participate in the next phase of the asset's expansion by reinvesting their commitment under new, generally more favourable economic conditions in the new continuation vehicle. On the other hand, new investors participating in these transactions are attracted by the lower risk, the receipt of distributions in a shorter period of time associated with mature assets, more competitive prices compared to those they would have to pay for primary investments, and the possibility of evaluating the assets in advance. This contrasts with traditional primary funds (blind pools), in which investments are made before the fund's portfolio is configured. In this sense, secondary transactions provide greater transparency and confidence in investments. As a result, the secondary market attracted a broader investor base, including pension funds, sovereign wealth funds, and family offices.

In light of the above, we can conclude that the rise of secondary transactions is deeply motivated by the changing needs of fund managers and their investors. In an era of volatility and uncertainty, these transactions offer a flexible, strategic and increasingly essential solution to address liquidity and portfolio management challenges. That is why, as the market continues to adapt and evolve, secondary transactions are expected to continue to play a key role in innovation within the alternative investment sector.