Significance of Selling Off Private Equity Investments in a Continual Private Equity Asset Base
In the world of private equity, secondaries offer a distinct asset class that can significantly bolster the construction of an evergreen portfolio. This guest article, published by Private Equity on AlphaWeek and authored by Jake Williams and Arthur Thomson of Franklin Templeton, explores the benefits of private equity secondaries and how they align with the goals of long-term, perpetually managed investment vehicles.
Liquidity and Flexibility
One of the key advantages of private equity secondaries is the increased liquidity they provide. By buying into existing private equity funds or portfolios at a later stage, investors can reduce the long lock-up and illiquidity commonly associated with primary private equity funds. This flexibility suits the evergreen nature of evergreen structures, offering more frequent liquidity windows.
Mitigating the J-Curve Effect
Unlike primary funds that experience a "J-curve" (initial negative returns due to upfront investments and fees before value appreciation), secondary investments typically bypass much of the capital deployment phase. This allows for faster realization of returns and smoother cash flow, which supports continuous portfolio management in evergreen vehicles.
Diversification and Risk-Adjusted Returns
Incorporating secondaries into a portfolio broadens exposure to a wider, more mature array of portfolio companies and sectors. This diversification lowers portfolio volatility and risk concentration, improving the overall risk-adjusted return profile.
Access to Mature Assets and Value Creation Opportunities
Secondaries, especially GP-led ones, often involve high-quality assets from mature portfolios and can unlock hidden value, fostering liquidity and efficient portfolio recycling without forced sales.
Aligning with Evergreen Goals
In summary, private equity secondaries enhance evergreen portfolio construction by providing ongoing liquidity, reduced volatility, better risk-adjusted returns, and more efficient capital deployment cycles. These attributes align well with the goals of long-term, perpetually managed investment vehicles.
Growing Adoption
The adoption of private equity secondaries continues to grow, as investors recognise their potential to deliver attractive risk-return profiles and improved cash flow timing.
Disclaimer
The views expressed in this article are those of the authors and do not necessarily reflect the views of AlphaWeek or The Sortino Group. This article is copyrighted and no part of it can be reproduced without written permission from the publisher.
[1]: Diversified secondaries managers construct portfolios across sectors, geographies, and industries, offering exposure to a wide range of private equity managers, providing greater diversification. [2]: Secondaries have exhibited lower correlation to public markets than private equity, potentially further enhancing portfolio diversification. [3]: Secondaries provided greater downside risk mitigation and shorter recovery periods during the global financial crisis and post-pandemic market correction. [4]: Selecting a secondaries manager with broad coverage is key to ensuring a well-diversified portfolio for an evergreen private equity allocation. [5]: Closed-ended/ drawdown funds with targeted investment strategies may be a more suitable access point than evergreen structures for pursuing a manager's expertise in a specific market segment. [6]: Secondaries help reduce manager concentration risk, mitigate downside risk, and adjust for performance variability across private equity managers. [7]: Investing in a single evergreen private equity fund may concentrate risk with one manager and potentially limit exposure to a narrower subset of private equity strategies. [8]: Private equity strategies vary significantly in performance, often linked to managers focusing on particular industries or regions. [9]: Selecting experienced managers who have navigated multiple market cycles and delivered strong performance is crucial when constructing a private equity portfolio. [10]: Private equity secondaries is a distinct asset class, involving buying and selling existing private equity fund interests or portfolios of assets.
One way to further align with the goals of long-term, perpetually managed investment vehicles is by investing in diverse secondaries managers who construct portfolios across sectors, geographies, and industries, offering exposure to a wide range of private equity managers, providing greater diversification.
Buying and selling existing private equity fund interests or portfolios of assets, known as private equity secondaries, can help reduce manager concentration risk, mitigate downside risk, and adjust for performance variability across private equity managers, improving the overall risk-adjusted return profile.
