The Artisan Podcast: Private Equity Secondaries: Beneficiary Of Rising Distress

In this episode of The Artisan Podcast, Northland Wealth Management Co-CIO Joseph Abramson moderates a panel discussion with three of the most experienced voices in private equity secondaries: Mike Pugatch of HarbourVest Partners, Patrick Gerbracht of Portfolio Advisors, and Patrick Knechtli of abrdn (formerly Standard Life Aberdeen). The conversation examines why secondaries have historically delivered the strongest risk-adjusted returns of any alternative investment category, how purchase discounts widen during periods of market distress, and what the 2022 environment of rising interest rates, inflation, and potential recession means for both the risks and opportunities in the secondary market.

Northland allocates to PE secondaries because the historical data is compelling: median annual gross returns of approximately 19.5% for top managers, loss rates below 2%, faster capital deployment and return than primary PE commitments, and built-in downside protection through discount purchasing. This episode digs into how those dynamics play out when markets turn volatile.

What Are Private Equity Secondaries and Why Do They Outperform?

Private equity secondaries involve buying existing stakes in PE funds or portfolio companies from investors who need or want to exit before the fund's natural lifespan ends. Because private equity is illiquid by design (fund lives of 10–12 years, no established trading exchange), sellers who need early liquidity typically accept a discount to net asset value (NAV) to attract buyers. That discount is the secondary buyer's embedded margin of safety.

The secondary market has grown from a niche activity in the mid-1980s to over $130 billion in annual transaction volume by 2021, with roughly $3 trillion of primary PE capital raised over the preceding five years creating the future inventory of secondary opportunities. The market operates across two main channels: LP (limited partner) interest transactions, where buyers acquire a seller's full position in one or more PE funds, and GP-led (general partner-led) transactions, where the fund manager restructures assets into a new continuation vehicle, giving existing investors the option to cash out or roll their position forward.

Secondaries outperform for several structural reasons. Buyers acquire portfolios that are partially or fully invested, which means they avoid the blind pool risk of primary fund commitments. The assets have track records that can be analyzed, management teams that can be assessed, and cash flow profiles that can be modeled. Capital gets deployed faster (since the assets already exist), distributions arrive sooner (since the assets are closer to realization), and the discount to NAV provides a return buffer even before any value creation at the portfolio company level. Historically, secondaries have delivered top-quartile PE returns with below-average risk and sub-2% loss rates across market cycles.

How Secondary Investors Make Money During Market Downturns

A central theme of the discussion is the counter-cyclical nature of secondaries. When public markets fall, interest rates rise, or recession fears mount, several dynamics converge to create a more favorable buying environment for secondary investors.

First, discounts widen. In stable markets, secondary transactions might price at 5–10% discounts to NAV. In distressed environments, discounts can expand to 15–25% or more. This happens because sellers face institutional pressure (rebalancing requirements when PE allocations breach policy caps), liquidity needs (funding new commitments or operational requirements), or simply a desire to reduce risk exposure. As Gerbracht noted, sellers who launched a process expecting a 5% discount were being told that the environment now warranted 15–20%.

Second, private equity valuations lag public markets by one to two quarters. When public equities have already fallen 15–20% but PE portfolios still reflect the prior quarter's NAV, there is a further anticipated markdown ahead. Savvy secondary buyers price this in, creating a double discount effect: the explicit purchase discount plus the expected NAV decline that hasn't yet been reported. Pugatch highlighted this dynamic as a key feature of the mid-2022 market, where two or more months of macro deterioration had yet to flow through Q1 private market valuations.

Third, the most experienced managers use downturns to tighten selection criteria dramatically. Portfolio Advisors reported rejecting 98% of deal flow during this period, focusing exclusively on companies with strong cash positions, long cash runways (in one case, 280 months), and the ability to acquire weaker competitors at distressed prices. This selectivity, combined with wider discounts, produces vintage years that historically rank among the best-performing in secondaries.

The Impact of Rising Interest Rates and Leverage on Secondary Strategies

Rising interest rates affect secondaries at two levels: the portfolio companies within PE funds, and the secondary fund itself if it uses leverage to enhance returns on purchases.

At the portfolio company level, higher rates increase debt servicing costs, which pressures cash flow. The panel emphasized that top PE managers had already taken defensive measures, including swapping floating-rate debt to fixed rate and focusing investments on businesses with pricing power capable of passing through cost inflation. The shift over the past two decades toward sector-specialist PE managers with deep operational expertise (as opposed to generalist financial engineers) has made PE portfolios more resilient to rate shocks than they were during the global financial crisis.

At the secondary fund level, leverage strategies vary significantly across managers. HarbourVest described a conservative approach: using leverage selectively against large, diversified portfolios with identifiable near-term cash flows and distributions that can service the debt. Managers who had been more aggressive users of leverage were expected to face both availability constraints (lenders pulling back) and higher costs that would compress the spread between gross and net returns. This divergence creates a meaningful differentiation point when evaluating secondary managers: the conservative-leverage funds maintain their return profile in rising-rate environments, while aggressive-leverage funds see their advantage erode.

European Secondaries: Different Dynamics, Different Opportunities

The panel devoted significant attention to the European market, which Knechtli described as having inflated less than North America during the post-COVID recovery and therefore having less far to fall. Europe is not a homogenous market; countries travel at different speeds, and localized factors (Brexit in the UK, Nordic IPO activity in Norway and Sweden) create pockets of both stress and opportunity that don't exist in the U.S.

A key difference at the time of recording was the effective shutdown of the European leveraged loan market, which had materially reduced the ability of financial buyers to fund new acquisitions. This constrained the exit options for PE managers and created a pipeline of forced or motivated sellers into the secondary market. At the smaller end, where abrdn focuses, alternative financing options and less competition from mega-fund buyers meant that attractive deals remained accessible.

Knechtli positioned abrdn as a niche player specializing in complex structures around high-quality portfolios, particularly in GP-led transactions at the smaller end where corporate finance expertise and long-standing primary relationships provide an information and access advantage that larger players cannot replicate at that scale.

GP-Led Continuation Funds and SEC Regulatory Developments

GP-led transactions represented the fastest-growing segment of the secondary market, and the panel explored both the opportunity and the regulatory scrutiny surrounding them. In a GP-led transaction, the fund manager sells assets from an existing fund into a new continuation vehicle, giving existing LPs the option to take liquidity or roll their exposure forward. For the GP, this allows them to retain their best-performing assets when exit markets (IPOs, M&A) are unfavorable. For secondary buyers, it provides access to high-quality, known assets with established track records.

The SEC was actively considering requiring independent valuation opinions on all GP-led transactions, driven by the inherent conflict of interest: the GP is simultaneously the seller (from the old fund) and the buyer (as manager of the new vehicle). Pugatch noted that many larger transactions already obtained third-party valuations, and that HarbourVest had consistently advocated for transparency and equal information access between sellers and buyers in these deals. His view was that the SEC requirement would be incremental belt-and-suspenders rather than a fundamental change to market practice, and would not slow the growth of GP-led transactions.

What Differentiates the Top Secondary Managers

Each panelist articulated a distinct competitive positioning. HarbourVest, one of the originators of the secondaries category in the 1980s with approximately $100 billion in AUM, differentiates on scale, data, and platform relationships. The firm sits on over 900 PE fund advisory boards globally, giving it an unmatched information advantage across deal flow, valuation, and manager assessment. Its size allows it to provide complete solutions for large GP-led transactions where few competitors can participate meaningfully.

Portfolio Advisors, with approximately $27 billion in AUM, positions as a mid-market specialist with one of the most extensive proprietary databases in secondaries. The firm emphasizes consistent, top-quartile returns across cycles (not a single standout fund followed by a miss), conservative leverage usage, and a fee structure differentiated from larger competitors. Its primary fund program provides direct GP relationships that create an information edge when evaluating secondary purchases in those same managers' funds.

abrdn focuses on niche and complex transactions in European mid- and lower-mid-market secondaries, where primary relationships with managers who rarely appear on the secondary market provide proprietary deal flow. The firm leads on smaller, structurally complex GP-led deals where larger secondary funds lack the corporate finance expertise or interest to compete, resulting in less competition and better pricing.

About the Panelists

Joseph Abramson (moderator) is Co-CIO of Northland Wealth Management Inc., an OSC-registered Portfolio Manager serving ultra-high-net-worth Canadian families. Abramson previously managed a long-short hedge fund through the 2000–2003 tech downturn.

Mike Pugatch is a Managing Director at HarbourVest Partners, one of the largest and longest-established secondary investors globally, with approximately $100 billion in assets under management and 35 years of secondary investing history.

Patrick Gerbracht is a Managing Director at Portfolio Advisors, which manages approximately $27 billion in assets with a focus on mid-market secondaries and a proprietary database providing information advantages across deal sourcing and underwriting.

Patrick Knechtli is Head of Secondaries, Private Equity at abrdn (formerly Standard Life Aberdeen), specializing in niche and complex European secondary transactions with deep primary-platform integration.

Transcript

SPEAKERS

Joseph Abramson, Mike Pugatch, Patrick Gerbracht, Patrick Knechtli 

Make sure to check The Northland’s YouTube Channel for more episodes.

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SUMMARY KEYWORDS

private equity secondaries, secondary market discounts, GP-led transactions, continuation funds, HarbourVest Partners, Portfolio Advisors, abrdn secondaries, LP interest transactions, PE leverage rising rates, recession PE impact, counter-cyclical investing, risk-adjusted returns