Secondary funds are vehicles through which fund managers gain exposure to a range of fund types and geographies for diversification and risk mitigation purposes. There are currently 38 secondary fund of funds managers actively investing in the private equity asset class, according to Preqin’s Investor Intelligence online service. The firms have $74.3bn in aggregate assets under management, and are based around world, with the largest proportion (47%) headquartered in North America. Thirty-four percent are Europe-based, specifically in western countries such as France, the UK and Switzerland. The remaining 19% of these investors have their head offices in regions outside of Europe and the US, with 11% based within Asia and 8% in the Middle East and Israel.
It is interesting to note that of the 38 secondary fund of funds managers currently investing on the secondary market, 86% would consider investing with first-time fund managers, and 50% would be willing to act as a first close investor – perhaps to take advantage of ‘early bird discounts’ in the form of the reduced management fees, or the ability to negotiate board representation.
The largest of these firms is Lexington Partners, which has $20bn invested in the private equity asset class. It is an active participant on the secondary market, having raised a number of dedicated secondaries vehicles. Lexington Partners has a preference for purchasing fund interests in buyout, venture capital and mezzanine vehicles. It invests in early secondaries and partakes in stapled secondary transactions, looking to acquire entire portfolios of interests as well as sole fund stakes.
Strategic Partners Fund Solutions is the second largest secondary fund of funds manager in this sample, with total private equity assets of $11bn. The firm is also an active player on the secondary market, and has previously raised a number of secondaries vehicles, including Strategic Partners Fund VI which is currently in market seeking $3.5bn in capital commitments. Strategic Partners Fund Solutions considers purchasing stakes in a range fund types, including in venture capital, mezzanine, buyout, growth and distressed private equity vehicles. Geographically, the firm primarily seeks exposure to Europe and the US. It will consider investing in a range of opportunities, from $250mn sole fund stakes to $1bn portfolios of interests.