Why secondaries are not a free lunch: the myth of the J-curve

In the third part of our series, Cyril Demaria, head of private markets at Wellershoff & Partners, argues the wait for returns is not as long as people think.

If you see investing as a matter of reconciling risks, returns and liquidity, differing liquidity enables investors to capture the upside of private market investing. This can be actively managed through planning and modelling.

Even the initial phase of the J-curve is less of a problem than is generally thought: in effect, investors experience it only once, when launching their long-term diversified program of annual commitments. The initial delay in putting capital to work disappears once the program reaches its ‘cruising pace’ and has become self-sustaining.

Distributions from early funds, investments from existing funds, and capital calls from later funds maintain a certain level of capital at work for investors over time.

Therefore, at best, secondaries can temporarily prop up returns when conditions (notably discounts) are favourable. But this triggers a specific asset allocation challenge: reinvesting this cash with the associated costs and the unpredictability of secondaries dealflows. The performance drag generated by the opportunistic nature of secondaries investments has to be taken into account.

In that respect, secondaries exhibit only a different kind of J-curve, once the delay in deploying capital is factored in. At worst, secondaries can lead to overpaying for assets, via premiums on inflated NAVs, and therefore to a clear underperformance. 


  1. Secondaries, like co-investments, should be used tactically to support a sound and long-term portfolio of primary fund investments in a strategic asset allocation. If not, investors take on risks similar to those associated with self-selected stocks versus ETFs. Very few (if any) succeed in this effort.
  2. As it is an expert play, investors should consider secondaries investing with specialised fund managers, possibly through an advisory mandate.
  3. Beyond returns, which can be elusive on a risk-adjusted basis, other reasons to invest in secondaries might include:

– Gaining a seat at the table to access future funds,

– Overweighting certain strategies or regions opportunistically,

-Snapping up a bargain under the radar or in niche sectors. In this respect, venture capital fund secondaries might be attractive. They support larger discounts and their NAVs are calculated more conservatively, as underlying assets are less supportive of mark-to-market. However, assessing these assets also requires on-going screening and significant expertise.

Cyril Demaria focuses on illiquid assets and is based in Wellershoff’s Zurich office. His prior experience includes founding multiple funds and being in charge of private markets research in the chief investment office of UBS.

Read the first part of Demaria’s research here and the second part here.