Private Equity Secondaries are relatively new investment opportunities.
This type of investment refers to a situation when a secondary buyer purchases a share in a private equity fund (indirect), or a stake in private equity-owned company (direct) from a seller, such as an existing limited partner (LP). Typically this requires general partner (GP) consent, and can be visualized as follows:
Description: overview of private equity secondary transaction
There are certainly benefits to private equity secondaries. Private equity funds can capitalize on pre-identified investments with underlying assets, minimizing their blind pool risk. Plus, secondary funds can help push a private equity fund through their uncertain early years where a negative cumulative cashflow can be occur before the fund matures, known as the J-Curve. Secondary funds can also deliver a powerful level of diversification in a very short time frame, helping to bring faster stability to a private equity fund.
But no rewards come without risks. Secondary funds, especially when a sizeable portion is exposed to non-dollar currencies, are prone to currency risk. There is also concentration risk, considering the large number of single-asset restructuring that have occurred in the past couple of years. And because secondary buyers get little time with general partners, access to information is more limited than what would typically occur with a primary investment.
As is the case with any growing market, it hasn't taken long for specific trends to develop with secondary funds. For example, an increasing percentage of secondary transactions are being led by general partners, creating value for fund sponsors and limited partners (LPs). It should also be noted that a record number of secondary funds are reaching their yearly publicly traded partnership (PTP) limitations, meaning they are likely to withhold approval for additional transfers to avoid initiating PTP status.
And, because of the continued growth and popularity of the secondary market, the majority of secondary transactions can be attributed to private equity funds devoted to this specific type of investment.
When it comes to the unique expenses accrued by participating in the secondaries market, operational software solutions are more important than ever. Private equity secondaries are burdened by increases in SEC compliance – especially for funds that require manual tracking of what's disclosed to LPs. There's also an increased level of engagement with limited partners advisory committees (LPACs) and a sizable uptick in reporting to LPs. Plus, the creation of special purpose vehicles and making investments into more liquid secondaries come with an increase in expenses. All of this is to say, any fund participating in private equity secondaries needs the backing of a smart, intuitive expense software to help them properly manage their endeavor.
So when it comes to private equity secondaries, it's important to have as much information as possible. While these funds are not without risk, they do present a wide range of benefits. New trends continue to emerge, and a reliable mid-and-back-office software is part of the key to staying on top of expenses and compliance.
If expense allocation software (or spend management software) could help your firm, get in touch with us or find out more:
Gary R Markham
Gary R Markham is co-founder and Chief Executive of aXpire fund solutions, which designs, develops and deploys an array of expense management tools. He is an author of many articles, regularly speaks at conferences, panels and symposiums, a Global Director of the Hedge Fund Association, a recent recipient of the Keys to the County of Miami Dade. Gary has over 20 years experience in FinTech, specializing in spend, expense management, vendor and allocation and apportionment software solutions.