A number of private equity, real estate and infrastructure investors seek exposure to early secondaries, buying interests in funds that are less than 30% funded. This strategy differs from that of traditional secondaries investments whereby an LP would typically look to purchase fund interests that are 70-75% invested. With the latter, investors rely on the performance on the companies in which the GP has invested to generate attractive returns, whereas with early secondaries, confidence must lie in the fund manager, who still has most of the fund to invest.
Of the 626 investors currently tracked by Preqin that look to buy fund interests on the secondary market, 110 (18%) have indicated they will consider investing in early secondaries. Almost half (46%) of these 110 investors are based in European countries, such as Germany, Switzerland and the UK. North America-based investors make up an additional 42%, and the remaining 12% are headquartered in countries outside of these regions, including in Australia, China and Singapore.
Private equity fund of funds managers make up the largest proportion (58%) of these investors with an interest in early secondaries transactions. They often include an allocation to secondary market opportunities within their funds of funds’ investment strategies, alongside a focus on primary investments and direct investments. Secondary fund of funds managers are the second largest investor that look to invest in early secondaries, representing 9% of the total sample. Other investor types that have expressed an interest in early secondary opportunities include insurance companies (6%), asset managers (5%) and infrastructure fund of funds managers (4%).
Preqin’s data shows that these early secondaries investors look to purchase interests in funds focusing on opportunities around the world, although the majority (76%) specifically seek fund stakes in Europe-focused vehicles. Sixty-one percent of the LPs target funds focusing on opportunities in the US, and 55% seek exposure to countries outside of the US and Europe through their secondary market investments.
The largest institutional investor tracked by Preqin which considers investing in early secondaries is Abu Dhabi Investment Authority. The sovereign wealth fund has over $62bn in assets under management and is an active participant on the secondary market, as both a buyer and a seller of private equity fund interests.