Secondaries under-performs other strategies over all periods

Returns for secondaries funds rose slightly on a quarterly basis but the strategy was the worst performing in the first quarter, according to data from the Institutional Limited Partners Association.

The ILPA Secondaries benchmark, which tracks pooled net internal rates of return, returned 1.30 percent in the three months to 31 March, an improvement on -0.42 percent recorded in the previous quarter. But while the fourth quarter’s return was above the All Funds benchmark, the first quarter’s was below.

Secondaries was the worst performing of all strategies under review in the first quarter, followed by natural resources and private credit funds, which realised net IRRs of 1.74 percent and 2.24 percent, respectively. The strategy is under-performing the All Funds benchmark across the 1-, 3-, 5- and 10-year periods, the data show.

Secondaries has performed best over a 10-year period, delivering a net IRR of 11.72 percent, and a 3-year period, returning 10.89 percent, against All Funds benchmarks of 13.19 percent and 12.18 percent.

In its 2019 Secondary Market Survey and Outlook report published in April, advisor UBS noted that return expectations are continuing to drop among secondaries buyers. For LP stake sales, 59 percent of respondents expected a gross internal rate of return of 17.4 percent or lower, compared with 52 percent in 2016. Almost 80 percent of respondents expect a gross IRR of 22.4 percent or less, compared with 63 percent of respondents in 2016.

“Most of the secondary LP mandates [we see] are becoming more flexible, with growth, venture and mezzanine fund stakes,” said Thomas Maurel, managing partner at secondaries advisor and placement agent Valery Capital. “Secondaries fund are having difficulty deploying in good buyout deals and are enlarging their mandates.”

Speaking at Florida State Board of Administration‘s investment committee meeting in October, senior investment officer John Bradley noted that the large amounts of secondaries dry powder was starting to be felt, Secondaries Investor reported.

“We’ve found it’s an area where there’s much less differentiation between the different firms. And I think today it’s an area where there has been so much money pouring in that it’s a much more difficult return to create for the secondary environment,” he said.