Deep Diving into PE Secondaries Market Trends: Arcano’s Strategy for Thriving in a Growing Market

The private equity secondary market has been experiencing unprecedented growth, offering investors a unique avenue to optimize liquidity, rebalance portfolios, and gain exposure to high-quality assets. At 0100 Europe in Amsterdam (April 2-4), Ricardo Miró-Quesada, Partner and Head of Private Equity at Arcano Capital, will be sharing key insights into the evolution of the secondary market, investment strategies, and sectoral opportunities in Europe and beyond at the panel “Watershed Moment for PE Secondaries in 2025”, together with Daniel Rygg from Turnstone Private Equity; Joaquín Alexandre Ruiz from EIF; Roman Hürlimann, Kline Hill Partners; Charles Aponso, Quilvest Capital Partners, and moderated by Gereon Tewes from The New Amsterdam Group.

In this exclusive conversation, Ricardo discusses Arcano Capital’s approach to secondaries, focusing on small and complex transactions, LP stakes, and GP-led deals across Western Europe and the United States. He also breaks down why certain sectors—such as healthcare, technology, and business services—offer strong defensive characteristics and how secondary investments are shaping ESG integration in private markets.

With 2024 setting a record-breaking $160 billion in secondary transactions, this episode provides valuable insights into the drivers behind this surge, the differences between European and North American markets, and the future of secondaries as liquidity alternatives continue to evolve. Don’t miss this deep dive into one of the most dynamic segments of private equity

What is Arcano’s PE secondary investment strategy?

Arcano’s PE platform started in 2006, has raised over €6bn in AuM, and covers the full spectrum via primaries, secondaries, and co-investments. We started doing secondaries in 2009 and have since raised five funds dedicated to this strategy.

Arcano’s PE secondaries strategy is centered in smaller and in many cases complex transactions, creating balanced portfolios via the acquisition of LP stakes and GP-led transactions, with a particular focus on small & mid-market buyouts in Western Europe and the United States. Furthermore, we prioritize high-quality profitable companies in resilient, high-growth sectors such as healthcare, technology, business services, and niche industrial - avoiding more cyclical sectors that are more vulnerable to economic downturns.

What is driving the growth of PE secondaries in Europe, and how might this evolve as other liquidity alternatives recover?

The private equity industry has experienced robust growth since the turn of the century, and especially since the global financial crisis of 2008. This growth was driven by various factors, including low interest rates, abundant liquidity, increased demand from institutional investors, globalization, a focus on technology, and a favorable regulatory environment.

2024 has been an attractive year for the private equity secondaries market, achieving a record-breaking estimated transaction volume of $160 billion. This milestone not only surpasses the historic high set in 2021 but also cements 2024 as the most active year on record for secondaries. Although still significantly lower in volume compared to the US secondary market, Europe’s secondary volume represented 27% of total volume in FY24. Several key factors are driving this continued growth:

Liquidity Needs and Portfolio Management: A growing number of LPs are leveraging the secondary market as a proactive portfolio management tool rather than solely responding to liquidity pressures, particularly as exit activity remained weak across most markets. In FY24, LP-led activity surged more than 40% year-over-year, highlighting the increasing reliance on secondaries for strategic rebalancing.

Acceleration of GP-Led Transactions: GPs continued to embrace the secondary market as a means to offer their LPs the option for liquidity while also holding on to and building further value in some of their best assets. GP-led volume in 2024 surpassed 2021 records, growing c.40% YoY and representing 44% of total volume in FY24, as a result of GPs’ focus on generating DPI and quality assets in the market.

Increasing interest from LPs: Secondary funds have increasingly gained recognition as an appealing alternative for investors seeking exposure to private equity, largely due to their ability to deliver more consistent returns and exhibit a significantly lower return dispersion, meaning the returns are generally more stable across a broader range of market conditions, making them a safer and more reliable option. 

Are there specific sectors or regions in Europe where secondary opportunities are particularly attractive?

Western Europe remains a highly attractive region for private equity secondary investments due to its large and mature market, strong deal flow, and geographical diversification. It offers exposure to a mix of mature markets such as the UK, Germany, France, and the Nordic region, supported by innovation-driven industries and export-heavy economies, which further solidify their attractiveness for long-term investment. Moreover, these regions have a mature and sophisticated private equity ecosystem, offering a compelling combination of SME density with a high concentration of top-tier GPs, institutional investors, and corporate investors.

When evaluating specific sectors in Europe, we focus on industries that offer stable cash flows, defensive characteristics, and long-term value creation, rather than targeting sectors by geography. This approach applies to both the US and Europe, with the most attractive sectors including:

-        Healthcare: tailwinds such as aging population, increasing healthcare expenditures and tech advancements make healthcare a top choice due to its defensive nature, stable cash flows, and non-cyclical demand;

-        Technology & Software: The digital transformation across industries continues to fuel strong demand for SaaS, cybersecurity, and AI-driven solutions. These businesses often have subscription-based revenue models, ensuring predictable cash flows.

-        Business Services: The increasing reliance on outsourced services across industries makes this sector a resilient investment area. Companies providing IT consulting, facility management, legal & compliance solutions, and business process outsourcing benefit from long-term contracts and recurring revenue models, ensuring stability and steady growth. This sector is also highly fragmented, allowing for buy-and-build strategies.

-        Industrials and Manufacturing: The growing investments in automation and Industry 4.0, and a strong focus on sustainability-driven manufacturing make European industrials a compelling secondary market opportunity, due to their high barriers to entry and long-term demand trends.

At Arcano, we avoid highly cyclical sectors and maintain minimal exposure to consumer discretionary, commodity-dependent industries, capital-intensive businesses, and those with significant balance sheet risk.

What are the key differences between the European and North American secondary markets?

They differ in terms of market size, transaction dynamics and regulatory landscape.

North America has the largest and most mature secondary market, accounting for almost 70% of global transaction volume in FY24. The region benefits from a deep pool of secondary buyers and sellers, a well-established ecosystem, and strong participation from large institutional investors, such as pension funds, university endowments, and insurance companies. This has resulted in a higher deal flow and more liquidity. As the market matures, there is an increasing trend towards greater specialization within the secondary market, including single-asset transactions, tail-end funds, direct secondaries, and venture capital secondaries, etc.

In contrast, Europe, while smaller, has seen rapid growth in recent years, now representing more than 25% of global secondary transactions. However, the investment landscape remains more relationship-driven, with a larger role played by family offices, smaller pension funds, and insurance companies. There are also more opportunities for smaller sized transactions.

What are the main challenges in identifying the right deals for secondary investments compared to other alternative investments?

Limited Transparency & Information Asymmetry: secondary investors, especially in the case of LP stakes, often have limited access to data on fund performance, portfolio companies’ metrics, etc., which makes the underwriting more challenging compared to alternative investments with more transparent data.

Liquidity: While secondaries provide faster liquidity compared to primary commitments, they still involve longer holding periods than some alternative investments like private credit. Exit routes depend on market conditions, buyer demand, and GP performance, making liquidity management a key challenge.

How do PE secondary investments contribute to ESG reporting and compliance?

While ESG integration has traditionally been more closely associated with primary investments, secondary funds are increasingly being held to similar standards due to growing demand from investors for responsible and sustainable investing practices.

Secondary investments often involve the purchase of LP stakes in funds with established portfolios, which means there is a greater availability of historical ESG data and performance metrics. Since the underlying assets are already operational, secondary investors have the advantage of assessing previous ESG practices, policies, and outcomes, making it easier to integrate and monitor these factors in their investment decisions.

Secondary investors can also encourage GPs to adopt or improve ESG practices, helping to align portfolios with industry best practices. They can also use engagement strategies to advocate for enhanced ESG measures, such as improving sustainability reporting or governance structures in the underlying assets. As a result, secondary investors also have the potential to drive positive change in terms of ESG compliance within existing portfolio companies.

In the growing landscape of GP-led secondary transactions, investors have greater influence. Secondary investors can negotiate specific ESG clauses in side letters, such as commitments to improve sustainability practices. This level of influence can have a direct and positive impact on ESG reporting, ensuring that ESG compliance becomes an integral part of the fund’s governance structure moving forward.