During the past decade, institutions such as the Canada Pension Plan Investment Board (CPPIB) together with endowments such as those of Yale and Harvard have successfully invested in private equity, which has further diversified their portfolios and improved returns. However, for many non-institutional investors (even very wealthy families), the 10-12 year life-cycle of a fund has proved too long. This is where secondary private equity investing becomes of importance.
Private equity secondary investing refers to the buying and selling of existing stakes in private equity funds from other fund investors. By nature, private equity investments are intended to be long-term investments for buy-and-hold investors. Secondary funds take an interest in high quality private equity funds from investors seeking liquidity in a fair and timely manner.
The benefits of secondary private equity investing include:
•The potential for investing in private equity assets at a discount to their net asset value. • The assets tend to be more mature and as a result return cash to investors quicker than investments into new private equity funds. • There tends to be a shorter investment life-cycle and thus the avoidance of the drag to performance from young and immature investments, known as the “j-curve” effect.
Investing in secondary private equity is a management intensive business where experience, skill and track record are crucial to success. The reputation of the secondary fund manager for timely evaluation, discretion and efficient execution is the key to driving opportunities. It should be noted, that while the life-cycle of a secondary private equity investment is shorter than traditional private equity, a time-frame of 7-8 years can still be expected.
When executed correctly, secondary private equity investments may add to a portfolio’s overall return as well as increase diversification within the private equity asset class by investing across vintage years, industries, geographies, managers and investment strategies.
Additional information can be found in Curve Appeal - Dipping into Private Equity which was published in the April 2017 edition of the Financial Post Magazine .