Secondaries acquire pre-existing commitments to private equity funds from investors who are looking for an early way out. They can also invest alongside private equity fund managers directly in deals.
As such, allocating to a secondaries fund provides investors the chance to diversify across strategies with one single investment. Secondaries can also offer liquidity events to investors who need to turn their positions into cash before a fund is fully liquidated.
“When looking at the risk/return profile of the different private equity strategies – standard deviation and median of the net [internal rates of return] – secondaries are in the lower quartile in terms of riskiness, but clearly have managed to achieve interesting returns,” according to Alexandra von Stauffenberg, associate director of INSEAD’s Global Private Equity Initiative.
INSEAD, one of the world’s leading business schools, recently hosted a panel discussion about the latest developments in the private equity secondaries market, focusing on changes brought by the global pandemic.
The panel was led by Claudia Zeisberger, a professor at INSEAD and co-director of its Global Private Equity Initiative. She spoke with alumni Francois Aguerre and Katrina Liao, both professionals at the secondaries firm Coller Capital. A recording of the panel is embedded below.
According to von Stauffenberg and the panelists:
“The private equity secondaries market has grown in line with the primary market. The key reasons are that secondaries allow investors to achieve liquidity early, rebalance their portfolios, modify exposures due to regulatory changes ‒ as we saw after the last global financial crisis ‒ and also lock in returns on their private equity investments…. When looking at the more traditional private equity industry only, secondaries are keeping pace, if not outpacing, the growth of the primary market.”
Asked how Covid-19 is impacting private equity secondaries, Aguerre mentioned that at the moment the producing accurate valuations of stakes in private equity funds and portfolio companies requires a nuanced approach.
Secondaries must examine underlying assets in a larger context, including the holistic business plan and not just their short-term profitability of portfolio companies, which may have been affected by changes to the macroeconomic environment.
Asked for his take on the future prospects of the secondaries market, Aguerre said “there’s massive growth still to come.”
See also: INSEAD’s complete article, “A Liquidity Cushion in Troubled Times: The PE Secondaries Market,” which is based on the conversation between Zeisberger, Aguerre and Liao below.