Preqin’s Secondary Market Monitor online service currently tracks 198 investors that are highly likely to acquire fund stakes on the secondary market, of which a third have a preference for purchasing stakes in tail-end funds. Preqin defines tail-end funds as transactions that involve the acquisition of interests in funds that are approaching, or have exceeded, the end of their anticipated lifecycle, which is typically between eight and 12 years.
Of these 66 potential buyers with a preference for tail-end funds, the largest proportion (49%) are based in Europe, followed by North America (42%). The remainder are based in countries outside these two regions, such as Israel, Mauritius and Japan. The largest of these secondary market buyers are US-headquartered HarbourVest Partners and Neuberger Berman. Both private equity fund of funds managers currently have $40bn in assets under management and are actively seeking to purchase global stakes in buyout and venture capital vehicles over 2017.
Other notable secondary market buyers with a preference for tail-end funds include:
- Portfolio Advisors: the $36bn private equity fund of funds manager is currently fundraising for its latest dedicated secondaries vehicle, Portfolio Advisors Secondary Fund III. The fund is targeting $1bn to acquire stakes in US-focused buyout funds and will also consider direct investments.
- Pavilion Alternatives Group (formerly Altius Associates): the UK-based private equity fund of funds manager typically seeks to target venture capital and buyout vehicles on a global scale.
There are associated negatives with investment in tail-end funds, particularly because these funds can add an unnecessary administrative burden and would also have few remaining assets, the value of which is only a small fraction of the original fund size. However, the transaction has become attractive to secondary market buyers because at this stage, a fund would be deep in ‘harvesting mode’, and therefore returning capital more rapidly, which would consequently help boost performance. In addition, secondary market sellers would most likely want to avoid the cost of monitoring the tail-end funds and therefore a fund may be purchased at an attractive discount to its actual value.