Michael Aldridge, President of Accelex, looks at the exponential growth of private market secondaries and the role technology can play to enhance data quality and support investment decisions.
Private secondaries are growing at pace as investors look for liquidity solutions in an increasingly volatile market.
In the first half of 2024 market value reached USD 68 billion, reflecting a significant shift in investor strategy towards more flexible, liquid options in private markets.
The sector is looking at a potentially record-breaking finish to 2024, according to mid-year advisory reports from Campbell Lutyens, Jefferies, Evercore and PJT Partners.
Despite this growth, the sheer volume and complexity of unstructured data, often trapped within PDFs and other document formats, poses a significant challenge for secondary market investors.
What’s behind the growth?
Over the past couple of years, public markets have been underperforming and IPO activity has been volatile. This has put pressure on investors as they look to other avenues for liquidity, and to rebalance their portfolios.
The availability of better data and transparency in private markets have made secondary investments more attractive and accessible. They also offer tailored and flexible solutions for GPs and LPs such as structured liquidity and continuation funds.
Secondaries provide investors with a place to buy assets years into their performance cycle, usually at a discount, which means the average holding time of the fund’s underlying assets will typically be shorter.
Compared with traditional private investments executed at fund inception, buyers have significantly more asset-level information available to them for the basis of their decisions.
However, carrying out independent valuation of all assets quickly and efficiently is key to capitalising on this data-rich deal environment.
Data is the lifeblood of decision-making
In secondaries, data is the lifeblood of informed decision-making and as more investors enter the space, the sheer volume of data associated with these transactions has skyrocketed.
What buyers are up against is how to access valuable content within a vast amount of unstructured data that is provided by the seller.
The three main challenges facing buyers include:
- Unstructured data – secondaries data lacks standardisation and can be found in multiple different formats, making it difficult to automate collection and analysis
- Multiple sources – data is spread among disparate sources, making it challenging to aggregate
- Resourcing – gathering, cleaning and analysing this data can be resource-intensive, requiring significant investment in tech and expertise
These challenges are creating a bottleneck in the due diligence process, which is paramount in secondary deals. With the volume of assets being exchanged, investors require deeper insights into risk factors, financial performance and potential future returns – which must be delivered quickly.
These manual processes are slowing them down while being costly, inefficient, time-consuming and often error-prone.
With the secondaries market forecasted to exceed $140 billion by the end of the year, these manual processes are making it seemingly impossible for buyers to strike the right balance between speed, scalability and accuracy without the occasional mis-valuation or missed opportunity.
The role of technology
To get the most out of this fast-moving market, technology must advance at the same rate.
Currently, there is a lack of automation technology in the market which would bolster secondaries buying.
But the appetite is there for a more sophisticated approach to minimise time spent acquiring, condensing and analysing various data points in a dynamic and responsive manner.
Advancements in technology mean that by adopting AI and machine-learning techniques, processes for these can now be automated.
This allows buyersto simplify the demanding workflow of secondaries and deliver tangible rewards including scalability, auditability, time and cost savings.
AI and automation can tackle and automate most pain points in the secondary due diligence process including:
- Manual investor portal access and document classification – by embracing AI and automation, this time-consuming process can become a thing of the past as documents can now be sourced and categorised
- Complex master-entity data management processes – the nature of these processes means that important data can be missed. By using the right tools,the process for identifying funds, assets and investors can be automated
- Manual data rekeying – by embracing a pre-trained intelligence engine, users can ensure accurate and dynamic data extraction
- Error-prone extraction and often inaccurate reporting – these limitations can be replaced by validating information with pre-built systematic checks and business rules
- Accessing and updating, or even duplicating, previously completed work – AI and automation advancements allow for previously and newly extracted data to be delivered directly into valuation models
Looking ahead
The huge growth of the private secondaries market has opened a lot of new doors for investors seeking liquidity in an unpredictable market.
However, this growth is also creating headaches for investors, particularly around managing and analysing the vast volumes of unstructured and disparate data.
To navigate this complex environment efficiently, secondary buyers must increasingly turn to technology.
By embracing AI and automation solutions, they can streamline workflows, reduce manual errors, and enhance scalability.
As the market continues to evolve, leveraging these tools will be essential for staying competitive and unlocking the full potential of secondaries.
Those who can harness the power of data and technology in this fast-paced, dynamic market will reap the rewards.
