Should You or Shouldn’t You Buy Secondaries? –

Benefits

Discounts. Secondary deals general fetch heavy discounts

More consistent returns. Secondaries generate more consistent returns relative to investing in the primary private equity market.

Less risk. Risk is lowered because investments in the secondary market tend to be more mature, as compared to investments in the primary market.

Quicker returns. Because underlying assets are more mature than in the corresonding primary market, capital is invested later and returns realized faster, generating greater returns.

Non-strategic yet healthy assets. Corporate venture portfolios provide the opportunity to buy portfolios deemed non-strategic yet are financially healthy.

Co-invest without management headache. Directs are commonly structured such that the buyer can take a strictly financial role; even as an LP in the case of a synthetic fund. Risk is further managed by the involvement of multiple financial and strategic investors in one synethetic fund.

Greater potential for returns. Buyers can quickly accumulate a large portfolio and deploy large sums of capital when purchasing portfolios in the secondaries.

Risks

Transparency and valuation. Especially in direct deals it is difficult to obtain objective or useful information on each portfolio company.

Deal cycle time. Secondary direct deals can be painstakingly long and costly, with extensive due diligence, legal review and negotiations.

Need for a GP. Many direct sales require a GP brought in, since the secondary buyers often view taking on that responsibility as limiting scalability.

Follow-on financing. Direct investments may require follow-on funding to be successful, in some cases an unlimited amount of future financings.

Potential easing of discounts. The secondary direct market is increasingly competitive, with aggressive new players bidding up prices.

Not enough good deals. Many believe there are too few deals and too much capital chasing them. Others believe the only portfolios to be sold are of dot-com and “me-too” investments.

Difficult to change strategy. Once a direct portfolio has been purchased, it cannot easily be liquidated should a strategy change be desired.