The J-Curve Hacker: Private Equity Secondaries
The J-Curve Hacker: Private Equity Secondaries
Why smart money buys “used” stakes to skip the 5-year liquidity valley and capture immediate NAV discounts.
Executive Summary
- The J-Curve Problem: In primary PE funds, you pay fees on committed capital immediately, but returns come years later. This creates a deep negative return valley (the “J-Curve”) for the first 3-5 years.
- The Secondary Solution: By buying an existing Limited Partner (LP) interest in a mature fund (Year 4-7), you enter when assets are already appreciating and distributing cash.
- Discount to NAV: Liquidity-constrained sellers often sell their stakes at a 10% to 20% discount to Net Asset Value (NAV), providing an immediate paper gain.
DPI is King
Forget IRR (Internal Rate of Return) which can be manipulated. Focus on DPI (Distributions to Paid-In Capital). In Secondaries, you want to see cash coming back within 12-24 months, not 10 years.
Mechanic: Flattening the Curve
Skip
Years 1-4
15-20%
Target IRR
Instant
Diversification
15% Off
NAV Discount
Simulation: Cash Flow Profile (Primary vs. Secondary)
Cumulative Net Cash Flow (The J-Curve Effect)
| Feature | Primary PE Fund | Secondary Fund |
|---|---|---|
| Entry Point | Inception (Year 0) | Mid-Life (Year 3-7) |
| Blind Pool Risk | High (Unknown Assets) | Low (Assets Visible) |
| Fees | On Committed Capital | On Invested Capital |
“In Private Equity, time is the enemy of IRR. Secondaries allow you to buy time—and assets—at a discount.”
Essential Resources
INTERNAL
BMT Playbooks