SUMMARY: Secondary markets in emerging economies are gaining traction as critical tools for liquidity, risk management and investment optimisation. Traditionally underutilised compared to their counterparts in developed markets, these platforms are now evolving into effective mechanisms that support the broader growth of private equity (PE) and venture capital (VC) ecosystems in emerging regions.
What Are Secondary Markets?
In PE and VC, secondary markets enable the buying and selling of existing investments, such as limited partner (LP) stakes in funds or direct ownership in companies. These transactions offer investors an opportunity to adjust portfolios, free up capital or mitigate risks. Secondary markets are particularly appealing for providing a way to realise returns without waiting for traditional exit routes like initial public offerings (IPOs) or mergers and acquisitions (M&A).
The Rise of Secondary Markets in Emerging Economies
Historically, secondary markets in emerging economies have faced challenges such as limited transparency, regulatory hurdles and illiquidity. However, these barriers are slowly diminishing, driven by a combination of global interest, improved governance and economic reforms. For example, investors are increasingly drawn to emerging markets in Asia, Africa and Latin America for their high growth potential, despite perceived risks.
The evolution of secondary markets in these regions has been accelerated by several factors:
- Increased Deal Activity: Growing private equity penetration has expanded the pool of assets available for secondary transactions, creating a more vibrant marketplace.
- Investor Demand: LPs in emerging economies are looking for liquidity solutions and secondary markets provide an effective exit vehicle for managing portfolio risks.
- Sustainability Goals: Secondary markets are helping drive investments into sustainable and impact-driven initiatives by unlocking capital tied to legacy assets.
Benefits of Secondary Markets for Emerging Economies
The expansion of secondary markets brings numerous advantages to emerging economies:
- Enhanced Liquidity: By offering alternative exit routes, secondary markets free up capital that can be reinvested into newer opportunities.
- Risk Mitigation: They allow investors to diversify portfolios and reduce exposure to specific markets or industries.
- Market Maturity: The availability of secondary transactions signals a maturing private equity ecosystem, attracting more institutional capital.
- Increased Efficiency: As these markets develop, transaction processes are becoming more streamlined, reducing inefficiencies that have historically deterred participation.
Challenges Hindering Growth
Despite their potential, secondary markets in emerging economies face obstacles that slow their progress:
- Regulatory Complexities: Inconsistent regulations across regions create hurdles for cross-border transactions.
- Valuation Gaps: Differences in asset valuation between buyers and sellers remain a common challenge.
- Limited Buyer Pools: Compared to developed markets, the pool of secondary market participants is smaller, which can impact deal completion rates.
- Transparency Issues: A lack of standardised data and reporting mechanisms makes due diligence more complicated.
Addressing these challenges requires collaborative efforts among governments, financial institutions, and private equity players to create a supportive infrastructure for secondary markets.
Unlocking Opportunities with Secondary Markets
The future of secondary markets in emerging economies looks promising. Initiatives like capacity-building programmes, investor education and regulatory reforms are key to fostering growth. Furthermore, the integration of secondary markets with sustainable finance is a game-changer. By unlocking “trapped” capital, these platforms are enabling reinvestments into sectors like renewable energy, healthcare, and education—areas critical for sustainable development.
Global private equity firms are also taking note. By expanding their presence in secondary markets within emerging regions, they can access untapped growth potential while fulfilling their environmental, social, and governance (ESG) commitments.
Conclusion
Secondary markets are playing an increasingly vital role in shaping the investment landscape of emerging economies. While challenges remain, their benefits—enhanced liquidity, improved efficiency and alignment with sustainability goals—are undeniable. As these markets continue to mature, they will unlock new opportunities for investors, support economic growth, and contribute to building resilient financial ecosystems across the globe.
By embracing these dynamics, stakeholders can position themselves at the forefront of an evolving and impactful investment paradigm.
