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Risk-Return Profile of Secondaries Funds – December 2014

by Claire McNeil

  • 18 Dec 2014
  • PE

Over the course of 2013, secondaries funds raised an aggregate $21.8bn and in 2014 YTD fundraising has risen to $24.2bn. Secondary fund investors include, for example, pension funds that need to adjust their private equity portfolios to meet target allocations, banks that must divest due to regulatory changes and GPs looking to liquidate portfolios. So what is it that attracts investors to the fund type?

The above chart illustrates the favourable risk-return profile of secondaries funds relative to other private equity fund types, which makes them so attractive to investors. Secondaries funds have the highest median net IRR of 14.9% and a standard deviation of 15.5%. This is in stark contrast to early stage funds, which have a higher standard deviation (17.9%) and far lower median IRR (3.9%), though within the early stage fund type there tend to be a few “home run” investments with very high IRRs. Funds of funds offer less variability in the IRR (standard deviation of 7.6%), however, the median net IRR of such funds (7.9%) is less than that of secondaries funds. 

Secondaries funds are also favoured for their ability to put capital to work faster than other private equity fund types, and by investing at a later stage in a fund’s life, allow investors to avoid the initial dip in the J-curve. Given the growing interest from LPs in the fund type and the growing fund sizes which have been witnessed over the course of the last year, the secondaries fund market looks set to continue to grow.

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