Quality street

The secondary space has improved

Distributions have dried up and this has led to liquidity issues among large institutional investors. Although they can use secondary markets, oversight committees restrict them from selling assets at a large discount. Consequently, they’ve had to sell their crown jewels to get liquidity at a good price to NAV. This has benefited secondary investors who are happy to pay for high quality assets.

As the market matures, the quality of underlying assets available in the secondary space has improved. This is largely due to the lack of capital being returned to LPs. A decade ago, LPs enjoyed successive years of positive cash flows (money returned versus money committed). In the last few years, however, the reverse has been true.

Nevertheless, effective participation requires robust asset and manager selection, strong origination and due diligence processes to avoid adverse selection and ensure the portfolio benefits from high-potential assets.

Improved flexibility, faster deployment, enhanced liquidity, broad diversification and often better risk-adjusted returns, compared to primary investments, are all hallmarks of secondaries and go some way to explaining why they have become a critical liquidity tool for institutional investors.

These hallmarks also play to the advantage of GPs when using secondaries as a core component of evergreen portfolio construction; particularly in multi-GP evergreens.