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Secondary Investing Strategies

It's important to keep in mind that secondaries represent a very small part of the total PE market: For the last several years secondary funds have represented about 3 percent of the U.S. PE market and even less of the worldwide market.

Some secondary funds are stand-alone, narrowly focused funds that do nothing but acquire secondary interests. There are also primary funds or funds of funds that have the authority under their limited partnership agreements to make secondary purchases.

Stand-alone secondary funds fall into one of two broad categories: very large and “smaller.” Very large, multibillion-dollar funds have a great deal of capital to put to work in a fixed period of time, and as a result they will generally pursue larger transactions. Investments of $50 million and greater most often involve an auction, and pricing can come under pressure. Smaller funds tend to pursue transactions where less competition exists and where the pricing is likely to hold up better.

The maturity of the PE interest being acquired via a secondary sale is a key determinant in establishing the price. The more mature the interest is (say, one that is in the sixth to eighth year of its life), the more will be known about the underlying investments. In the hypothetical case of a seven-year-old fund that has completed its investment period, all of the portfolio companies will be in place and can be analyzed. This, of course, cannot be done with a two-year-old fund, which ...