[PE Now] The 'New Normal' Secondary Market... Emerging as a Solution in a Maturing Industry

Cases of Secondary and Continuation Funds Accumulating in Korea

Global Trend: Shift from LP-Led to GP-Led Transactions

"Regulatory Relaxation Came Late, Not Yet an Industry Trend for PE"

As the private equity fund (PEF) market enters a mature phase, there is growing attention on the secondary market, which can provide liquidity for investors seeking to cash out. Globally, the secondary market has already become the “new normal,” and a similar trend is emerging in Korea’s private equity sector.

The secondary market refers to transactions where existing investors sell their stakes or portfolio assets to other investors before maturity. In the secondary market, buy and sell transactions typically occur in the mid-to-late growth stages of companies that private equity funds have previously invested in. As a result, buyers can invest in companies with established growth potential and achieve returns in a relatively short period, while sellers can offer limited partners (LPs) an early opportunity for capital recovery to meet LPs’ requests for liquidity.

Secondary Funds Increasing in the Korean PE Market

According to investment banking (IB) industry sources on March 23, the 240 billion won secondary fund jointly managed by Stonebridge Capital and KB Securities PE is expected to exceed an internal rate of return (IRR) of 10%. A representative from Stonebridge Capital said, “Some of our current portfolio companies, such as Musinsa and Megazone Cloud, are preparing for an initial public offering (IPO), and the performance of previously exited companies has also been solid.” It has been confirmed that the investment returns have already been distributed to LPs. This fund, which matures in 2027, has an option to extend and is likely to be extended for one more year.

Recently, at the “PEF Management Company Internal Control Workshop” held by Korea Development Bank, which is an LP, plans for a secondary-related commitment program were reportedly discussed. The program is expected to proceed within this year. A Korea Development Bank official stated, “Nothing has been finalized yet, so the size has not been determined.” In December 2024, Korea Development Bank also announced a “Fund for Revitalizing the Exit Market,” providing a total of 120 billion won and selecting delegated management companies. At the time, the bank provided 90 billion won to M&A-related funds and 60 billion won to secondary funds.

The growth of the secondary market in PE has been driven by a trend among LPs to prioritize distribution to paid-in (DPI) over IRR. Kyungja Lee, Head of Alternative Investment at Samsung Securities, stated in the report “PE Market Entering a Mature Stage” that “A good corporate portfolio is held for a long time and managed in a way that offers selective liquidity to existing LPs and quality assets to new LPs. This preserves the alpha of private equity, reduces duration, risk, and uncertainty, and shortens the investment period, which is typically the most expensive cost.”

Continuation funds are also accumulating notable cases. A continuation fund is a GP-led strategy in which the fund manager (GP) remains the same while recruiting both existing and new LPs. When a GP finds it difficult to exit, the GP can sell the LP stakes in the existing fund to provide liquidity to current LPs. Last year, European PE firm CVC Capital reportedly transferred the travel and leisure platform “Yanolja Otta” to a new continuation fund. JC Partners also created a continuation fund for the corporate insurance general agency GoodRich and opted for a long-term investment strategy.

Global Trend on the Rise...What About Korea?

Globally, secondary transaction volume is on an upward trajectory. The secondary transaction volume, which was 103 billion dollars in 2022, grew to 226 billion dollars last year, setting a new record high.

The secondary market is also shifting from LP-led to GP-led transactions. According to alternative investment data provider Preqin, the proportion of LP-led sales was about 68% until 2019, but plummeted to 46% in 2020, and since then, the ratio of LP-led and GP-led sales has remained nearly equal. Unlike LP-led sales, which are focused on urgent sales, GP-led transactions have seen lower discount rates and more face-value deals. According to global PEF advisory firm Campbell Lutyens, the proportion of face-value transactions in GP-led deals was only about 30% in 2024, but jumped to 48% in the first quarter of last year.

Globally, the number of exits through continuation funds has surged from just 2 cases each in 2016 and 2017 to 147 cases last year. One of the most prominent examples is Blackstone’s formation of a continuation fund in 2020 to maintain its stake in the “BioMed Realty” portfolio, which was initially created in 2016. The assets were sold for 14.6 billion dollars, allowing investors to generate 6.5 billion dollars in profits.

However, industry insiders say that it is still premature to call the secondary market a trend in the Korean PE market. An executive at a PE firm commented, “The secondary market is relatively active in the venture capital sector in Korea, but not so much in PE. Overseas, the secondary market has grown mainly around LPs, whereas in Korea, regulations on secondary funds for LPs under the Financial Investment Services and Capital Markets Act have only recently been eased.”

Previously, the Capital Markets Act required PEs to hold at least 10% of voting shares, making it impossible to acquire less than 10% of existing shares. However, with the removal of this clause in October 2021, the secondary market has gained more flexibility, allowing PEs to purchase some existing shares held by other PEs. Nevertheless, the executive added, “Although the law has changed, uncertainties around exit remain high, so LPs are still hesitant to participate.”

This content was produced with the assistance of AI translation services.