The Local Government Pension Scheme (LGPS) faces a complex investment landscape. Persistently volatile public markets, pressure to improve funding ratios, demands for long-term sustainable returns, and increasing scrutiny over governance and liquidity have led some pension investors to rethink traditional portfolio construction.
Within this context, private market secondaries represent a compelling opportunity for the LGPS. Once viewed as a niche corner of private equity, the secondaries market has evolved into a sophisticated and institutional asset class capable of delivering attractive risk-adjusted returns, enhanced diversification, and improved liquidity management.
For long-term investors, secondaries could serve as both a potentially return-enhancing allocation and portfolio management tool.
But what, you may ask, are secondaries? A fair question. A secondary transaction occurs when an investor sells an existing interest in a private markets fund or portfolio to another investor before the underlying assets are fully realised.
Historically, secondaries predominantly involved limited partners seeking liquidity from private equity funds. Today, the market has expanded considerably and now includes general partner-led restructurings, continuation vehicles, infrastructure secondaries, private credit portfolios, and real asset transactions.
This evolution has transformed secondaries into a roughly £200bn ecosystem that offers institutional investors exposure to mature private market assets with greater transparency and shorter duration than traditional primary funds.
Charlie Bridgeland, a partner on the secondaries team at Lexington Partners, a subsidiary of Franklin Templeton, noted that much of this growth has occurred over the last decade. “What has happened over the last ten years, the number of sellers – limited partner selling – has grown enormously, because they are not getting enough liquidity. But then you add to this the general partner-led seven-year phenomenon. These are proving to be some of the highest quality assets in private ownership.”
For LGPS plans, secondaries can address several structural challenges associated with private market investing.
Potential for risk-adjusted, attractive returns
One of the strongest arguments for investing in secondaries is their historical ability to generate attractive returns, often with lower levels of risk compared with traditional buyout funds.
Secondary investors typically acquire assets later in their lifecycle. In a secondary transaction, investors can analyse existing portfolio companies, historical performance data, cash flow profiles, and operational trends before committing capital. This greater visibility can materially improve underwriting quality.
Additionally, secondaries are often purchased at discounts to net asset value, particularly during periods of market dislocation. These discounts can provide a built-in margin of safety and create immediate upside potential. For the LGPS seeking strong long-term returns without excessive volatility, this is highly attractive.
Academic and industry research has consistently shown that secondaries have historically delivered private equity-like returns with lower dispersion and reduced downside risk.
For LGPS plans, which must balance return generation with fiduciary responsibility, such characteristics align closely with solid, prudent institutional investing principles.
In addition, liquidity management is becoming increasingly important for UK pension funds. Although LGPS plans benefits from a long investment horizon, they must still manage pension payments, capital calls, and broader portfolio liquidity carefully.
Secondaries can improve cash-flow because investments are typically acquired in more mature funds. Unlike primary private equity commitments, where capital may be drawn over several years and distributions may not begin for a prolonged period, secondary investments can often produce earlier distributions and faster capital recycling.
This shorter duration profile can help reduce the so-called “J-curve” effect associated with private market investing – the tendency for private equity funds to produce negative returns in their early years due to management fees and initial investment costs before value creation materialises.
With the potential to mitigate this effect, secondaries can provide LGPS plans with more predictable rates of distribution and improved portfolio pacing.
Broad portfolio diversification
The LGPS sector is increasingly allocating capital to private markets, including infrastructure, private equity, and private credit. However, concentration risk remains a concern, particularly when committing to a limited number of large managers or vintages.
Secondaries can offer immediate and broad diversification across managers, geographies, sectors and asset types. A single secondary transaction may provide exposure to hundreds of underlying assets. This diversification can reduce concentration risk and improve portfolio resilience during economic downturns.
For LGPS plan pools seeking efficient scale, secondaries may also allow for accelerated deployment of capital into diversified portfolios without waiting years to build exposure through primary commitments alone.
One of the challenges facing institutional investors is accessing top-tier private market managers. Many of the highest-performing private equity and infrastructure funds are heavily oversubscribed and difficult to enter through traditional primary fundraising processes.
The secondaries market can provide indirect access to these managers through the purchase of existing limited partner interests. This can help LGPS plans gain exposure to high-quality assets and franchises that might otherwise remain inaccessible.
“Secondaries have been around for a long time,” added Bridgeland.
No limit
In addition, the secondaries market is no longer limited to traditional private equity. Infrastructure secondaries have grown rapidly, offering exposure to renewable energy, digital infrastructure, transportation assets, and utilities.
Given the LGPS sector’s increasing focus on sustainability and local economic development, infrastructure secondaries become especially attractive. They can provide long-duration, inflation-linked cash flows while supporting energy transition objectives.
Despite their advantages, it should be noted secondaries are not without risks.
The market has become increasingly competitive, which may compress discounts and future returns. Manager selection is therefore critical. Successful secondary investing requires specialist expertise in valuation, structuring, legal analysis, and portfolio underwriting.
Conversely, Charles Bridgeland noted opportunities exist to invest in some of the most attractive managers and assets. “We are trying to invest with who we believe are the highest quality managers. If you tried to go out and build these relationships organically, that could take you years. It is a ten-year job to get into half of these things,” he said. “If you have a traditional private equity programme, you have to map the market and identify the groups that you want to invest with and do your due diligence, and then hope they have room to take you, because some of most attractive managers are often oversubscribed and difficult to access.”
Bridgeland also noted the importance of data. “The more information you have means you are in more funds, invested indirectly in more companies. You can use things like pattern recognition and even use some AI tools to understand the data, the trends, especially around valuation.”
Ultimately, the LGPS sector operates under growing pressure to deliver strong returns, manage risk prudently, and maintain sufficient liquidity while navigating increasingly uncertain economic conditions. Secondaries can offer a compelling solution to many of these challenges. “For an institutional investor, secondaries offer a much easier way to access the private market compared to building a portfolio organically,” said Bridgeland.
