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Secondaries trump public markets for long-term investors

Secondaries deliver higher returns than public equities in the long run, according to data from two industry bodies.

Secondaries offer attractive returns for long-term investors, beating public market investments after as little as five years, according to data compiled by two private equity industry bodies.

Secondaries deliver a 14 percent net internal rate of return (IRR) at the five year mark, compared with 12 percent for the S&P 500, according to data from the Private Equity Growth Capital Council (PEGCC) and the Institutional Limited Partners Association (ILPA). After ten years, secondaries delivered a 12 percent return, whereas the S&P 500 had a 6 percent return.

Private equity still remains the best source of returns for long-term investors, delivering a 15 percent net IRR after five years and 13 percent after 10 years.

The benchmark indices used for private equity and secondaries were the ILPA U.S. Private Equity Index (excluding venture capital) and ILPA Secondaries indices.

Private equity generally can have higher returns as the asset class is considered riskier, whereas secondaries are considered less risky as they generally invest further along in a fund’s life cycle in where management fees may be less and underlying investments are generally better understood. Returns are also seen as less volatile than primary investments or public equities.

Despite consistent high returns for secondaries funds, it remains an unexplored sub-asset class for some investors.

One London-based market participant at a global investment firm said he wasn’t yet seeing investors making switches in their portfolios from public investments or fixed-income to secondaries.

“Although some investors may look at secondaries as a good yielding strategy, I haven’t seen yet a lot of investors making a big switch in their portfolios,” the participant said.

Source: PEGCC and ILPA