LPs are eyeing secondaries in a downturn environment where traditional exit routes are constrained and are investors tackling the denominator effects on their portfolios, a report has found.
More than half (59 percent) of LP respondents to Montana Capital Partners’ annual investor survey said their strategic preference is to deploy capital in secondaries in the current market environment, ahead of other well-established strategies such as growth and venture capital. Mid-market buyout topped the list as the preferred strategy at 81 percent.
“We are increasingly thinking about a first-time allocation to secondaries, as pricing is becoming very attractive, and secondaries have historically had strong performance after a downturn,” an institutional investor said in their response to the survey.
Return expectations across primary funds, secondaries funds and direct and co-investments have decreased, the report noted.
Just under half of LPs (45 percent) indicated they expect net returns for secondaries funds of between 11 percent and 15 percent, with 34 percent expecting a return of 16 percent and over.
Almost half of respondents (49 percent) indicated they expect primary funds to return between 11 percent and 15 percent, with 43 percent expecting returns of more than 16 percent.
Return expectations for directs and co-investments continue to command a premium, with 49 percent of respondents expecting returns of 16 percent to 20 percent and 29 percent expecting returns of 21 percent and over. The report noted that expectations for directs and co-investments have come down, with 43 percent of respondents expecting returns above 20 percent.
“Looking back over the last few years, there haven’t been major shifts in respondents’ stated return expectations for secondaries funds versus, for example, three to four years ago,” Eduard Lemle, a managing partner at Montana, told Secondaries Investor. “Based on our conversations with investors in secondaries funds, many LPs like the specific benefits of broad diversification, J-Curve mitigation, and earlier cashflows, as well as the attractive overall risk-return profile.”
“The slightly lower expectations for direct/co-investments in this year’s survey may be a reflection of the changed market environment characterised by increased volatility and uncertainty,” he said.
More than half of family offices and foundations and almost 40 percent of institutional investors surveyed have allocated more than 10 percent of their portfolio to secondaries. An investor from a large endowment told Montana Capital Partners: “Secondaries plays a critical role in our PE allocation as they offer an attractive mix of broad diversification and earlier cashflows”.
It is unclear how many LPs Montana surveyed for its report.