Private equity: understanding the secondary market
The secondary market has become a useful tool for liquidity within the private market arena. General partners (GPs) and limited partners (LPs) alike can manage assets or release cashflow through a secondary transaction, if situations or investment strategies change.
Just as the popularity, size and sophistication of private markets have grown over time, so too has the number of opportunities and offerings in the secondary market. So what’s the appeal of the secondary market and what should investors know about this area of growing interest?
In brief, many investors are drawn to secondary funds for these distinct characteristics that set them apart from the primary market.
- Early liquidity – distributions come quicker as portfolio companies are later in the hold period.
- J-curve smoothing – secondaries transactions can benefit from quicker uplifts in valuations, mitigating the initial negative returns associated with primary commitments.
- Portfolio visibility – less blind-pool risk than a primary fund commitment.
- Broad diversification – secondaries typically invest in more managers and portfolio companies, and across vintages, sectors and geographies.
As with any investment strategy though, there are key points of diligence and difference that investors should consider. There are various considerations for LP-led and GP-led secondary transactions, some unique to each category, others that apply to both. One example of the latter is that of alignment, a topic we explore in more detail in our paper.
With a diligent and thoughtful approach, we believe an allocation to secondaries can enhance investors’ private market portfolios.
Important Disclosures
This material has been prepared by Titanbay Ltd and its affiliates (together, “Titanbay”) and is provided for information purposes only. This document is directed at professional investors and qualified investors who have sufficient knowledge and experience to understand the risks of investing in private market investments.
This material should not be construed as legal, tax, investment advice or an invitation, general solicitation, recommendation, an opinion regarding the appropriateness or suitability of any investment strategy, or offer to buy, sell, or hold any investments or securities offered on or off the Titanbay investment platform. The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice.
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Investments in private placements and private equity investments via feeder funds in particular, are complex, highly illiquid and speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance, including simulated performance, is not a reliable indicator of future performance. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investors who cannot hold an investment for the long term (at least 10 years) should not invest.
Titanbay Ltd is an Appointed Representative of Brooklands Fund Management Limited which is authorised and regulated by the Financial Conduct Authority with firm reference number 757575. Copyright Titanbay 2023.
