Secondaries returns down over multiple time-frames

Secondaries funds underperformed the all-alternatives benchmark in the fourth quarter of last year across most times-frames, according to data from the Institutional Limited Partners Association.

The ILPA Secondaries Benchmark, which tracks pooled net internal rates of return, delivered 3.76 percent in the three months to 31 December, down from 4.41 percent the previous quarter. This was below the ILPA All Funds benchmark of 4.68 percent in the fourth quarter.

Secondaries was the fifth best performing strategy on a quarterly basis. The strongest performer was the Asia-Pacific PE & VC benchmark, which achieved a pooled net IRR of 6.81 percent, followed by Europe PE & VC, which returned 6.31 percent in US dollar terms.

Secondaries has underperformed the index across 1-year, 3-year and 5-year time-frames, by 0.59, 1.64 and 1.71 percentage points, respectively.

The strategy outperforms across a 10-year period, accruing 9.04 percent compared with 8.81 percent for the All Funds benchmark.

ILPA’s data is based on returns for 3,849 funds.

The 2018 Secondary Market Survey and Outlook report, compiled by the secondaries advisory team at UBS, noted that 23 percent of secondaries buyers had lowered their returns targets over the last year as growing competition places downward pressure on performance.

Speaking to Secondaries Investor in April, Sunaina Sinha, managing partner of secondaries advisor and placement agent Cebile Capital, suggested that high levels of dry powder could have negative consequences down the line.

“Across the market there is this pressure to put dollars to work and come back and raise another fund while the market is so good,” she said. “Most of the market is using leverage and that’s going to increase dry powder even further. The question in the background for investors is, is this going to push valuations even higher? Will returns suffer over the long run?”