0:02
[Music]
0:14
On today’s segment on alternative investments, we will provide an overview of private equity secondaries.
0:20
While the secondaries market is mainly focused on private equity assets, other alternative asset classes, such as real assets and private debt, can also incorporate secondaries into their overall strategies.
0:31
Let’s begin with a quick review of a private equity transaction.
0:33
In a primary private equity transaction, limited partners, known as LPs, commit capital to be invested by the general partners, known as GPs.
0:42
After funds are called and raised from LPs, there is typically a period of several years during which redemptions are prohibited. This is designed to give the companies acquired by the GP time to build value for the LPs before a liquidity event occurs.
1:00
Selling investments on the secondary market is not new. The New York Stock Exchange has served the public equity secondary market since the late eighteenth century.
1:08
Assets under management, or AUM, for private equity secondaries have grown at a compounded annual rate of 20.2% since 2000, outpacing the overall growth rate of primary private equity AUM, which has grown at 12.9% over the same period.
1:25
The main drivers of private equity returns, including the use of leverage, appreciation in the value of acquired companies over time, and new cash flows generated by these companies, all play a role in the performance of secondaries.
1:38
Secondaries tend to avoid the J-curve period of negative returns often seen in a primary private equity fund.
1:43
The J-curve is common in the first few years due to the delay between initial capital calls and the final capital calls, when the GP has fully acquired the underlying companies for the portfolio.
1:59
Returns during this period are generally negative, then can increase rapidly as the acquired companies build value.
2:05
Since secondaries are generally acquired later in a primary fund’s life cycle, they tend to involve fewer additional capital calls and a shorter time before LPs can receive distributions.
2:18
Whereas investors in private equity funds often have limited insight into the companies to be acquired by the general partner, secondary buyers tend to invest in funds with more mature companies that are generating consistent cash flows.
2:31
As the secondaries market has grown and matured, three common types of transactions have emerged, each with distinct features. We will look at these in a future episode.
2:40
If you have further questions, please reach out to us via our website at KAGglobal.com.
2:49
Until our next episode, please keep searching for ways to enhance your wealth.
