Generally, a secondary private equity investment occurs when the current investor or LP in a private equity fund looks to sell their investment, through an intermediary, to another investor. The secondaries market offers investors a way to access liquidity in a traditionally illiquid asset class. Secondary PE investments can include the trading of stapled deals with a primary commitment, general partner spinouts, and fund restructurings, GP-led tender offers for LP interests, continuation funds and direct investments in single assets.
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Investing in private assets via the secondary market involves purchasing a private market asset or fund from the existing owner of these assets.
In a secondary transaction, the buyer acquires the existing commitment and the remaining unfunded commitments of the seller. The buyer is typically acquiring a mature asset or portfolio.
The secondary transaction offers several benefits for the purchaser including greater visibility — and potentially lower risks putting your money to work faster, potential for increased returns, and diversification.
When investors commit to a primary fund, there is an element of blind-pool risk.
This means investors don’t have full visibility into which investments the fund manager will make in the future.
In a secondary transaction, investments have already been made, providing the secondary buyer with greater visibility into the underlying assets, associated risks and return history.
Primary fund investors tend to experience negative returns during the early life of the fund, with return profiles turning positive as investments mature and are realized. This is commonly known as the “j-curve.”
In secondary transactions, because the commitments have already been made, the buyer can seek to mitigate the j-curve effect and potentially benefit from a shorter payoff profile.
Secondaries can often be purchased at a discounted value of the underlying assets, providing the potential to increase returns.
Secondary transactions enable investors to add a range of historic vintage years to their portfolios, which can further diversify risk and return profiles.
We believe there are four key risks to consider for secondary investing.
You need a dedicated team of investment professionals, access to the right data and management systems, established networks and deal flows, and the expertise and structure for timely execution.
Effective investing via secondary transactions is resource-intensive and requires specific skills.
We’re here to help.
We have been helping clients with secondary investments for many years. Talk to us to see how we could help you.
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