Why Secondaries

Overview

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.

Why Focus on Secondaries

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 sometimes enjoy 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 both enjoy positive returns in the later years of a fund, but secondary investors 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.

J-Curve

The chart shown above 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.

Secondary Investment Characteristics

Definition
 A Limited Partner interest is sold to another investor, considered to be the "second" purchaser of the LP interest
Types
 Traditional secondaries, secondary directs, and secondary co-investments; all private equity asset classes
Assets Acquired
 Funded, mature underlying portfolio companies, with transparency into performance
Age of Assets
 Average 3-7 years
Cost of Investment
 Potential discount to Net Asset Value (NAV)
Return of Capital
 Years 1-7
Diversification
 By vintage year, type, size, sector and geography
Potential
Advantages
  • Early IRR gain & cash flow potential
  • Ability to potentially purchase at a discount
  • Reduced blind pool risk
  • Shortened holding period
  • Diversification by vintage, industry, geography, etc.
  • Reduced cost – avoidance of early year fees and expenses

 

The information presented herein is for illustrative purposes. There is no guarantee that every secondary investment will have all of the foregoing characteristics. Investments in private equity involve a substantial degree of risk, there is no guarantee that any investment in a Pomona-sponsored fund will ultimately be profitable and an investor could lose some or all of its investment.