ILPA: low secondaries IRR in Q1

Global secondaries funds are underperforming other strategies in terms of their net internal rate of return, according to data from the Institutional Limited Partners Association.

During the first quarter of 2014, secondaries funds generated a pooled net IRR of 1.49 percent, which compares to the 3.21 percent average net IRR for all the funds examined (including private equity, venture capital, fund of funds, distressed and natural resources funds).

Source: Cambridge Associates and ILPA Private Markets Benchmark

Secondaries funds also lagged over longer time periods, albeit by smaller margins. Over the one-year period ending 31 March 2014, secondaries funds generated IRR of 15.9 percent, lower than European private equity and venture capital funds (23.47 percent) and US and Canadian private equity funds (19.43 percent).

Secondaries funds registered a 10-year net IRR of 11.72 percent – lower than all other strategies apart from distressed funds, US and Canadian venture capital funds and fund of funds, which generated the lowest net IRR (9.91 percent). Across all funds globally, the 10-year return as of 31 March 2014 was 13.04 percent, an increase from the figure last December’s 12.9 percent.

Matthew DeMatteis, a director of research at ILPA, told Secondaries Investor that pre-recession, 2004 to 2007-vintage funds were dragging average returns down while funds from 2008 onwards were performing much better.

“There’s almost $25 billion in unrealised net asset value in 2004 to 2007-vintage funds. That’s about half the NAV in the entire secondaries universe,” DeMatteis said. “A lot of that $25 billion is significantly older than the vintage of those secondaries funds. These will be ten-year old companies that the GP cannot exit. That will continue to drag down performance even with the public markets improving.”

Data from Capital Dynamics revealed that 1993- through 2009-vintage secondaries funds outperformed primary funds in terms of net IRR. Secondaries funds formed in this period generated an average net IRR of 17 percent, compared to the 12 percent net IRR generated by their primary fund counterparts.

“IRRs for secondaries may be coming down slightly these days as people are more aggressively underwriting purchases. Then again some of the funds apply leverage, which could boost IRRs back up again,” Capital Dynamics director Sandro Galfetti said.

Still the IRR of secondaries funds is expected to continue to outperform the net IRR of primary funds by about 5 percent, Galfetti added.

The ILPA data is based on returns as of 31 March 2014 for 2,890 funds, including more recent, younger vehicles.