Investors have flocked to private equity secondaries over the last three years largely driven by the allure of acquiring stakes in private equity (PE) funds at deep discounts to net asset value (NAV). Structural perks like J-curve mitigation and the elimination of blind pool risk, highlighted in our whitepaper “Secondaries in First Place,” further add to the appeal. But much like a knock-off Rolex that can’t keep the time, not all bargains are worth the buy. This same logic holds true with secondaries. Smart shoppers know to look beyond the price tag before buying from the discount rack.
So, what should investors look out for when assessing secondaries? We outline the considerations with an emphasis on analyzing the quality of the sponsor and underlying portfolio.
Five steps to evaluate private equity secondaries
| 1 | Evaluate technical and fundamental drivers for pricing discounts. |
| 2 | Seek managers with a track record of generating returns through appreciation—not simply relying on discounts. |
| 3 | Consider the importance of a portfolio’s age to its go-forward return potential. |
| 4 | Assess the manager’s ability to source unique deal flow. |
| 5 | Find the right vehicle to meet liquidity needs, investment time horizon and return expectations. |
