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Why some HNW investors are nervous about secondaries

JB Hayes, director of private markets at wealth management firm CTC/MyCFO, has been recommending his high net worth clients curb their investments in secondaries as pricing has reached new highs.

Higher pricing in the past year and the perspective of potentially lower returns have prompted some ultra-high net worth investors in secondaries funds to retreat from the secondaries market for the time being, according to a financial advisor catering to them.

“The discount to [net asset value] is narrowing a bit,” JB Hayes, director of private markets at Portland, Oregon-based wealth management firm CTC/MyCFO, told Secondaries Investor. “We’re concerned how it will play out going forward.”

Hayes started increasing exposure to secondaries funds on behalf of his clients over the past five years and has so far committed more than $225 million to those funds. In terms of allocation, CTC/MyCFO’s clients typically target 15 to 20 percent to private markets, of which about 15 percent is allocated to secondaries.

Initially, he saw several reasons why investing in secondaries funds would be a good fit for his clients, who are largely based in the US and have anywhere between $25 million and multi billions of dollars in assets.

Hayes said that secondaries have historically provided strong returns with lower volatility and solid diversification. Additionally, investing in secondaries funds can be a quick and easy way to get back-dated vintage year diversification when a client is starting a new private equity portfolio. “You get exposure faster and to vintage years you aren’t able to access any other way,” he said.

For smaller clients, Hayes used to recommend investing in funds of funds but he has reduced the exposure to that strategy and turned to secondaries funds instead. “Secondaries funds historically have higher internal rates of return with early distributions to LPs, while funds of funds typically take longer to return capital,” he said.

But in the past year, Hayes has recommended his high net worth clients  wait and see as pricing has been hovering around the mid to high 90s.

“We’ve pulled back in the past 12 months,” Hayes said. “There seems to be a lot of capital chasing deals. It’s still a compelling opportunity but return expectations have gone down a bit. We haven’t recommended much except for managers utilising a unique investment strategy.”