The Evolution of Secondary Transactions and the Revivification of Zombie Funds
Secondary transactions have always been the most private part of private equity. For much of the nineties, secondary deals were viewed as tainted, and the general, ill-informed view was that the transactions involved weak investors selling their positions in poorly performing funds. The feeling seems to have been that it was mad to sell a position in a well-performing fund, so both the seller and the underlying general partners whose funds were being traded were
often considered weak. While many transactions are, and were, driven by the distress of the seller, sellers then and now also sold positions in order to focus on some sponsor relationships rather than others, or to liberate capital, and it was never true that selling was always driven by weak investors divesting bad assets. Secondary players are rational economic animals, and a bad asset, whatever the discount, normally stays bad. Better to pay more for an asset with
potential than gamble on the bad becoming good.