Private Equity’s New Liquidity Engine: Rapid Growth in Co-Investment Secondary Volume Shows They Are Serving Both Sellers and Buyers Well

Consider this fact: Last year, even as fundraising across private markets fell by roughly 17 percent, co-investment fundraising rose by more than 17 percent year over year to about $27 billion.

That divergence is the clearest sign yet that co-investments have graduated from a novelty to a core allocation for LPs. And it brings with it a significant phenomenon: the emergence of a genuine secondary market for co-investments – one that can serve as a repeatable solution for both limited partners and co-investment platforms.

The logic behind the growth in allocations for co-investments is clear. Co-investments allow LPs to deploy capital directly into a sponsor’s deal alongside the fund, usually at sharply reduced economics, often with no fees or carry. This lowers the LP’s cost of a private-equity program while concentrating exposure in a manager’s highest-conviction names.

GPs offer co-investments to reward and retain their largest and most loyal backers and to make larger equity commitments in their portfolio companies. But this co-investment capital now faces the same liquidity squeeze that has gripped the rest of the private equity industry. Exits have been slow, and holding periods are lengthening. Like direct PE sponsors, managers of co-investment funds need to return capital and raise successor funds. And big allocators are interested in liquidity from concentrated positions and co-investment funds they once held to maturity.

A Changing Resale Market

Until recently, there was no good answer. A co-investment stake — concentrated in a handful of companies and operationally unique — was considered nearly unsaleable at scale. The seller would offload ordinary fund interests and leave the co-invest book untouched because buyers were either unwilling to make concentrated single-company secondary investments or uninterested in underwriting a basket of two or three dozen direct positions.

That has changed quickly as the result of three forces converging:

• First, the secondary funds have grown large enough that a single buyer can absorb a one- to three-billion-dollar portfolio without scrambling to syndicate it.

• Second, the buy side has become comfortable with concentration. The boom in continuation vehicles — deals built around just one or a few companies — trained the market to underwrite focused positions rather than insist on broad diversification. That same appetite now extends to co-investment portfolios.

• Third, and most importantly, the buyers already know the assets. Secondary supply of co-investments is largely concentrated among large, broadly held buyout managers, meaning buyers are typically already invested in the funds that hold these co-investments. Secondary investors, therefore, already follow these companies closely and increasingly use sophisticated data tools and artificial intelligence to value their portfolios in near real time. They are not starting from scratch in their underwriting. A bespoke portfolio that once would have demanded months of bottom-up analysis can now be underwritten in a few weeks.

Both Sides Win

What makes this secondary market compelling is that it is not merely a liquidity backstop for selling LPs; both buyers and sellers can come out ahead.

For sellers, it is a long-awaited release valve. A pension or sovereign wealth fund can now sell part of its direct and co-investment holdings — something it never would have attempted before — and then recycle the proceeds into new commitments.

For buyers, the prize is lower-cost exposure to attractive companies, frequently newer-vintage positions with meaningful upside still ahead, at entry points unavailable a year ago. Pricing and buyer turnout still hinge on the familiar fundamentals: the quality of the sponsors, the breadth of the portfolio, and how much runway remains.

New Opportunities

None of this is theoretical. The market is already clearing landmark deals, including one that is shaping up to be the largest co-investment secondary ever executed by an institutional allocator — a portfolio of roughly two dozen companies valued at around $2 billion.

A transaction of that scale and concentration would not have closed two years ago, for lack of both buyer depth and the speed to evaluate it. Now, a corner of private equity long defined by waiting is becoming one defined by opportunity.

The supply underpinning this growing segment of the secondary market is structural, not cyclical. A recent survey found 88 percent of investors plan to increase their co-investment allocations, many targeting up to a fifth of their private-markets capital. As that capital grows, so will the need to trade it — and the secondary market emerging to meet that need is only getting deeper.

Where Jefferies Fits In

Capitalizing on a young, fast-moving market like this requires a rare combination: longstanding relationships with the allocators and co-investment sponsors who control the supply, a deep network of buyers willing to underwrite concentrated portfolios, and the structuring judgment to make each deal work for everyone at the table.

Jefferies’ Private Capital Advisory practice brings all three. As the most active advisor in co-investment secondaries — having transacted the largest co-investment volume in the market, advised on more than $18 billion of co-investment exposure, and led the defining deals in this emerging space — Jefferies is best positioned to help sellers seeking liquidity and buyers seeking opportunity make the most of the co-investment secondary’s arrival.