InvestingRetirementTax Tips
Private Equity Secondaries: How to Buy $1.00 of Growth for $0.85
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Private Equity Secondaries: How to Buy $1.00 of Growth for $0.85
CORE INSIGHTS
- The Opportunity: “Secondaries” involve buying existing Private Equity stakes from sellers who need cash. You often get a 10-20% discount to Net Asset Value (NAV).
- The “J-Curve” Hack: Traditional PE funds lose money in Years 1-3. Secondaries enter in Year 5-7, skipping the negative years and stepping right into the harvest (payout) phase.
- The Safety Margin: Buying at a discount creates an immediate buffer. If you buy a $100 asset for $85, the asset can drop 15% and you still break even.
In Private Equity, patience is expensive. Investors who can’t wait 10 years are forced to sell at a discount. Secondaries allow you to be the liquidity provider, effectively buying a dollar for 85 cents.
The Discount Arbitrage
- Scenario: Fund NAV $1M. Purchase Price $850k (15% Discount).
- Exit (1 Year): Fund distributes $1M (0% Growth).
- Primary Return: 0% (Paid $1M).
- Secondary Return: 17.6% (Paid $850k).
*Verdict: The discount creates yield even in a flat market.
What-If Scenario: $500k Allocation (Primary vs. Secondary)
| Metric | Primary Fund (Year 0) | Secondary Fund (Year 5) |
|---|---|---|
| Entry Cost | $500,000 (Par) | $425,000 (Discount) |
| First Distribution | 3-5 Years | Immediate (0-6 Months) |
| Risk Profile | Blind Pool | Known Assets |
Visualizing the J-Curve Skip
*Figure 1: Cash Flow Profile. Secondaries (Green) avoid the deep ‘capital call’ valley of Primary PE (Red).*
Strategic Action Steps
1
Identify Evergreen Funds
Look for interval funds (e.g., Hamilton Lane) that specialize in secondaries. These allow quarterly liquidity for Accredited Investors.
Look for interval funds (e.g., Hamilton Lane) that specialize in secondaries. These allow quarterly liquidity for Accredited Investors.
2
Check “Discount Width”
In bear markets, discounts widen (NAV ~80%). This is the best time to deploy. In bull markets, discounts narrow.
In bear markets, discounts widen (NAV ~80%). This is the best time to deploy. In bull markets, discounts narrow.
3
Verify GP-Led Exposure
Ensure the fund has a mix of “GP-Led Restructurings” (trophy assets) and “LP Stakes” (diversified pools) for balance.
Ensure the fund has a mix of “GP-Led Restructurings” (trophy assets) and “LP Stakes” (diversified pools) for balance.
The Bottom Line: Who Should Choose What?
- Do This: Accredited Investors seeking 12-15% returns with immediate cash flow and lower duration risk.
- Avoid This: If you cannot tolerate illiquidity. Even interval funds can limit withdrawals (5%/qtr).
Frequently Asked Questions
What are Private Equity Secondaries?
Buying existing PE fund commitments from investors who need liquidity. These stakes are often sold at a discount to NAV.
What is the ‘J-Curve’ and how do Secondaries fix it?
Traditional PE funds lose money early (fees). Secondaries enter later, skipping the negative years and entering the harvest phase.
How can individuals access this?
Through platforms like Moonfare or ‘Evergreen Secondary Funds’ that allow Accredited Investors to participate with lower minimums.
Disclaimer: Private equity is illiquid. Discounts are not guaranteed. Consult an advisor.
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