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Separating bargains from busts: Five steps to evaluate private equity secondaries

Investors have flocked to private equity secondaries driven by the allure of deep discounts. We outline the five considerations an investor should keep in mind when assessing secondaries.

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September 26, 2024 | 5 minute read

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Daniel Wilk, CAIA®

Executive Director, Client Portfolio Manager

Madison Murphy

Associate, Fund Communications