Buying stakes in tail-end funds managed by top-quality general partners delivers higher returns than purchasing stakes in younger vintages and lower-quality managers, according to a report by research provider PERACS.
The study modelled the performance characteristics of early, mid and late secondaries strategies across four quartiles of GP quality and found that in general, investing in tail-end top quartile-managed funds was the best way to ensure the highest returns. This is true only for buyout funds.
If you cannot buy the top quality tail-end fund stakes, then your second-best choice is to secure a high discount on tail-end fund interests.
Purchasing tail-end fund stakes, those in vehicles eight years or older, regardless of the quality but at higher discounts, delivered higher total value to paid in (TVPI) ratios than strategies that buy stakes in funds less than seven years old.
TVPI is the ratio of the current value of remaining investments in a fund, plus the total value of all distributions to date, relative to the total amount of capital paid into the fund to date.
“Late-stage secondaries will in general only outperform if they have a higher discount than the others, unless you’re certain to invest in top-quality fund managers,” Oliver Gottschalg, PERACS founder and author of the report, told Secondaries Investor. “Then, late secondaries even outperform if you don’t get any additional discount.”
Mature funds generally trade at greater discounts in the secondaries market, and Gottschalg’s study confirmed that tail-end funds are generally able to deliver higher returns.
“Already at a simulated 20 percent greater discount, mature funds outperform their younger peers on a TVPI basis and even more so on an annualised basis,” the report noted.