Greater Discounts for Tail End Secondary Investments Justified

PERACS recently applied its full suite of analytical tools to a specific task: Analyzing “tail-end” or “late” secondary investments, a distinct secondaries market sub-segment investing in primary fund interests at least eight years old.

The study found that across eleven simulated secondary fund vintages (2000 to and including 2010), assuming no differences in prices, the performance of late secondary investments lies below that of their younger counterparts. With this assumption, younger investments perform better even on an annualized basis (Figs. 1 and 2). The results suggests that the steeper discounts that mature funds are often trading at in the secondary market may well be justified.


Furthermore, PERACS determined that the underperformance of late secondary investments is driven by those investments made into lower quartile primary funds. For secondary investments in fund interests of top-quartile funds, late secondary investments – both in terms of “Total Value to Paid in” (“TVPI”) and PERACS Rate of Return (“RoR”) – are more attractive than similar investments made in Early and Mid Secondaries (Figs. 5 and 6).


To read PERACS’ full report, see the recent Preqin Private Equity Spotlight piece titled, Return Characteristics of Mature Secondary Fund Investments, written by Dr. Oliver Gottschalg, PERACS’ Founder.

PERACS’ study used Preqin’s performance data from over 800 global buyout funds with 1980 to 2013 vintages to simulate the performance of a hypothetical secondary investor buying a given subset of these funds at a given age and a given price (expressed in terms of discount to NAV) and compare the performance of these investments to primary commitments in the same sample of funds. PERACS measured performance in aggregate terms using the TVPI of each simulated secondary fund and PERACS Rate of Return (TVPI^(1/Duration in years))-1), a performance measure designed by PERACS that avoids the distortion and overstatement of performance inherent in traditional private equity performance measures such as Internal Rate of Return (“IRR”).

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