The Time Machine: Private Equity Secondaries
The Time Machine: Private Equity Secondaries
Buying $1.00 of assets for $0.85: How to skip the “J-Curve,” avoid blind pools, and acquire mature private equity portfolios at a discount.
Executive Summary
- The Concept: Institutional investors (LPs) sometimes need cash quickly and sell their existing Private Equity stakes before the fund matures. Secondary Funds buy these stakes, often at a 10-20% discount to Net Asset Value (NAV).
- Mitigating the J-Curve: A typical PE fund loses money in Years 1-3 (Fees + Capital Calls). Secondaries enter in Year 4-7, skipping the loss years and receiving distributions (DPI) almost immediately.
- No Blind Pool Risk: In a primary fund, you invest in a “strategy” without knowing the companies. In Secondaries, you can see exactly which companies are in the portfolio before you buy.
The Valuation Lag
Private markets report valuations quarterly, not daily. A “15% discount” might be an illusion if the underlying assets haven’t been marked down to reflect a recent public market crash. True due diligence requires re-underwriting the assets, not just trusting the NAV.
Mechanic: The Secondary Arbitrage
No J-Curve
Immediate Cash Flow
NAV Discount
Buy Low Entry
Vintage Year
Diversification
Visibility
Know What You Own
Simulation: Cash Flow (Primary vs. Secondary)
The “J-Curve” Effect Mitigation
| Feature | Primary PE Fund | Secondary PE Fund |
|---|---|---|
| Entry Point | Inception (Year 0) | Mid-Life (Year 3-7) |
| Asset Visibility | Blind Pool (Unknown) | Transparent (Known Assets) |
| Fees on Commit | Paid on full commitment | Paid on funded amount |
“In primary PE, you pay fees hoping the manager finds good companies. In secondaries, you pay for companies that are already succeeding, and you get them on sale.”
Essential Resources
INTERNAL
BMT Playbooks