As interest in private equity increases, three quarters of LPs are now invested in secondary companies
The interest of asset owners in alternative assets simply will not cease.
According to new data from Coller Capital, the number of investors planning to increase their allocation to the asset class is at an all time high since the financial crisis.
The data, compiled from a survey conducted in February and March of 111 private investors around the world, shows that these investors have a contradictory view of the market.
On the one hand, most of those interviewed said that they believe this is the best time to make new commitments in private equity. On the other hand, the majority also say that it is more difficult than usual to select general partners.
Enter secondary funds: investments that allow limited partners to access second-hand private equity portfolios. In a side trade, an investor can re-engage with a proven investment manager, increasing their allocation of risk capital along the way, if they so choose.
According to the survey, 77 percent of those surveyed have already invested capital in the type of fund. Half allocated between 1 and 10 percent of their private equity portfolio to secondary, while 5 percent allocated more than 30 percent to strategy.
Over the next three to five years, 21% of allocators said they plan to increase their exposure to secondary private equity funds, while 15% said they will increase their allocation to other types of funding. alternative secondary funds.
“Institutional investors are aware of managing their portfolios in the private markets and use the secondary market as a vehicle to do several things,” said Jared Barlow, partner at Kline Hill Partners, a secondary fund.
First, according to Barlow, they can use secondaries to add certain private equity strategies – like buyouts or tech-focused funds – to their portfolio without having to deploy new capital. They can also manage vintage exposure by buying or selling side investments, Barlow said.
“There are long-to-tooth investments that are relative rounding error in their portfolios,” Barlow said. To cope, limited partners can sell their investments through a secondary vehicle, he added. On the other hand, asset owners may want to tap into older investments to avoid the J-curve – the tendency of private equity investments to show negative returns during the first few years before performance breaks down. improve.
Another advantage for the secondary? Decrease the number of GP relationships, and therefore the complexity of portfolio management.
“Many LPs reduce the number of GP relationships,” Barlow said. “What I’m hearing from some sellers and market participants is that they have relatively small teams and portfolio oversight has become remote.”
But that’s not the only reason they’re considering more concentrated positions with fewer investment managers. According to Barlow, putting more capital to work in a single manager can help an asset owner achieve “preferred savings,” which can include better fee structures or access to more solid investments. “Concentrating their assets with a GP allows them to become more important to the GP,” Barlow said.