Private Equity Secondaries' Significance in a Continuously Growing Private Equity Asset Base
Investing in Private Equity Secondaries Offers Advantages for Evergreen Portfolios
Private equity secondaries have emerged as a promising asset class for evergreen portfolios, offering key benefits such as increased liquidity, diversification, and more consistent returns with better principal preservation.
Liquidity and Capital Recycling
One of the primary advantages of private equity secondaries is the increased liquidity they provide within typically illiquid private markets. By allowing investors to buy and sell stakes in existing private equity funds, secondaries enable more efficient capital recycling. This means that investors in evergreen portfolios can redeploy capital dynamically without long lock-in periods.
Diversification and Risk Mitigation
Secondaries offer a solution to the risk of concentrating investments in a single manager or market segment. By accessing a broad range of vintages, sectors, and fund stages through secondaries, portfolios gain enhanced diversification. This reduces risk and smooths return volatility, providing more consistent performance compared to primary private equity investments.
J-curve Mitigation and Faster Distributions
Investing in secondaries often involves buying into funds or companies at a later stage, helping to mitigate the notorious "J-curve" effect (initial negative returns) of direct private equity investing. This leads to quicker distributions and more predictable cash flows, a valuable feature for evergreen vehicles seeking ongoing liquidity and capital deployment.
Access to Established Assets with Track Records
Secondaries enable entry into assets with more mature, audited financials and proven governance, reducing uncertainty and improving visibility into performance. This aligns well with an evergreen strategy’s emphasis on stability and long-term value.
Market Efficiency and Opportunity for Discounts
Investors can often acquire stakes at significant discounts (sometimes 30% or more) in tail-end secondaries, providing potential for attractive risk-adjusted returns in evergreen portfolios.
Building a Diversified Secondaries Portfolio
Diversified secondaries managers construct portfolios across sectors, geographies, and industries, offering exposure to a wide range of private equity managers. Selecting a secondaries manager with broad coverage is key to ensuring a well-diversified portfolio.
Conclusion
Overall, private equity secondaries enhance evergreen portfolio construction by combining liquidity and flexibility with exposure to mature assets that offer diversification, principal preservation, and steady returns. This enables investors to manage exposure dynamically over time to align with market conditions and risk appetite.
About the Authors
Jake Williams is Global Co-Head of Alternatives Wealth Management Product at Franklin Templeton. Arthur Thomson is Global Alternatives Product Strategy Specialist at Franklin Templeton.
Disclaimers
The views expressed in this article are those of the authors and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
Footnotes
[1] Franklin Templeton. (2021). Private Equity Secondaries: A Primer. Retrieved from https://www.franklintempleton.com/us/en/insights/articles/2021/01/private-equity-secondaries-a-primer.html
[2] Preqin. (2020). Private Equity Secondaries: A Guide. Retrieved from https://www.preqin.com/research/reports/private-equity-secondaries-guide-2020/
[3] McKinsey & Company. (2019). Private equity secondaries: The next frontier. Retrieved from https://www.mckinsey.com/industries/private-equity/our-insights/private-equity-secondaries-the-next-frontier
[4] Coller Capital. (2020). The 2020 Coller Capital Global Private Equity Barometer. Retrieved from https://www.collercapital.com/insights/the-2020-coller-capital-global-private-equity-barometer/
Incorporating private-equity secondaries in an evergreen portfolio enables more efficient capital recycling due to increased liquidity provided within typically illiquid private markets. Furthermore, secondaries offer a means of achieving enhanced diversification, reducing the risk of concentrating investments in a single manager or market segment.
