The average performance for secondaries funds is 5.76 percent more than the average performance of primaries, therefore “the out-performance exists, but is not as blatant as expected”, eFront said in a recent report that compared six different vintage years from 1998 to 2011.
It noted the recent popularity of secondaries was in part due to the strategy’s shortened J-curve for investors, ability to put large sums to work at once and potential discounts to net asset value that might boost returns.
“There’s a pretty heavy bias for secondaries. All in all people seem pretty bullish on secondaries,” eFront chief operating officer Eric Bernstein told Secondaries Investor. “Generally speaking we expected to see higher returns and in this case they were pretty comparable.”
He added that the narrow out-performance could be explained by a timing effect, in that transactional volume in private equity direct funds was very heavy during select pre-crisis vintages, more so than the traditional J-curve model. He also explained that some secondary books analysed in the report may have “had a bunch of dogs in them” as a result of the crisis.
eFront also gave the following example as to why primary and secondary funds from the same vintage years may not actually be comparable: “A primary fund of funds of 2007 will invest over 2007, 2008 and 2009 (or maybe 2008, 2009 and 2010). A secondary fund of funds of 2007 will buy stakes of funds of the previous eight to 10 years. Moreover, though influenced by the same macroeconomic patterns, the realisations, distributions and the maturity of the underlying assets will differ substantially.”
The story has been updated to reflect the fact that Eric Bernstein is eFront’s chief operating officer, not chief executive officer.