Secondary investments are primarily purchases of funds that are three to seven years old with existing underlying portfolio companies. Sales are often driven by an investor’s need for liquidity or active approach in managing their private equity portfolio. They are typically acquired in private negotiated transactions as there is no established market for secondaries.
Why Focus on Secondaries?
Two ways in which investors can gain access to private equity is through secondary and primary investments. Investments in the primary market are made directly in newly formed private equity funds. In the secondary market, investors buy existing limited partner private equity interests available on the secondary market from other limited partners.
What is a Secondary?
- Secondaries are composed of existing assets, which means the underlying fund may have already deployed the majority of its capital to portfolio companies
- As a result, secondary private equity investments are viewed as more mature investments than primaries
- Secondary investments may have shorter investment periods and accelerated returns on invested capital
- Investment returns from secondary investments may not exhibit the pronounced cash flow and "J-curve" characteristics that are normally associated with primary investments
Mitigating The J-Curve
Generally, primary and secondary investors may receive positive returns in the later years of a fund, but secondary investors may receive those returns within a shorter investment time frame. Pomona typically seeks to acquire funds whose commitments are 70-90% invested and three to seven years into their expected 10-year life cycle. Cash distributions typically occur earlier in the life cycle of secondary funds and are more evenly distributed.
The chart shown to the right is for illustrative purposes and does not represent past or projected performance of an actual product. There is no guarantee performance will match this illustration. These is no guarantee whether expressed or implied that actual cash flow will follow this pattern. Technically, a secondary can occur any time between time '0' and '12' in this illustration.