Private Equity Secondaries' Significance in a Continuously Operating Private Equity Portfolio
In the world of private equity, investing in secondaries through an evergreen structure is gaining popularity. Evergreen funds, open-ended investment vehicles, offer several benefits, particularly around liquidity, portfolio diversification, and efficient capital deployment.
Evergreen funds address the usual liquidity constraints of traditional closed-ended private equity funds. By allowing continuous capital inflows and periodic redemptions, they provide quicker capital deployment and earlier potential returns than primary commitments. This is because secondaries invest in portfolios that are already partially realized or closer to exit events, reducing the typical long holding periods.
Investing in private equity secondaries through an evergreen structure also lowers investment minimums and provides higher liquidity compared to traditional closed-ended funds, making private equity more accessible, especially to institutions and increasingly retail investors. Moreover, secondaries acquired within evergreen funds can be at discounts to Net Asset Value (NAV), offering attractive entry points and the ability to manage liquidity flexibly.
Secondaries also help reduce manager concentration risk, mitigate downside risk, and adjust for performance variability across private equity managers. They have exhibited lower correlation to public markets than private equity, potentially further enhancing portfolio diversification.
The strategic extensions offered by GP-led secondaries, where managers can retain top-performing assets longer and align incentives by reinvesting alongside investors, can enhance value creation beyond forced sales situations. Evergreen funds engaging in secondaries benefit from these strategic extensions.
Selecting a secondaries manager with broad coverage is key to ensuring a well-diversified private equity portfolio. Diversified secondaries managers construct portfolios across sectors, geographies, and industries, offering exposure to a wide range of private equity managers.
In summary, private equity secondaries in an evergreen structure combine the liquidity and accessibility features of evergreen funds with the maturity and potential discount advantages of secondaries, providing efficient capital deployment, flexible liquidity, and diversified exposure to private equity assets. As investor adoption of private equity secondaries continues to grow, it is clear that they provide greater diversification, more consistent returns, and better principal preservation, making them a strong foundation for an evergreen private equity allocation.
The views expressed in this article are those of the authors and do not necessarily reflect the views of AlphaWeek or The Sortino Group. This article is a Private Equity Guest Article© The Sortino Group Ltd. All Rights Reserved. No part of this publication may be reproduced without the written permission of the publisher.
Jake Williams, Global Co-Head of Alternatives Wealth Management Product at Franklin Templeton, and Arthur Thomson, Global Alternatives Product Strategy Specialist at Franklin Templeton, are among the experts advocating for the benefits of investing in private equity secondaries through an evergreen structure. Primary private equity strategies can deliver outperformance, but their variability in returns suggests they should only be pursued when advisors have high conviction in a manager's expertise within a specific market segment.
[1] Evergreen Funds and Private Equity Secondaries: A Match Made in Heaven? (2021), The Sortino Group Ltd. [2] Private Equity Secondaries: A New Era of Investing (2020), Franklin Templeton Investments. [3] The Role of Private Equity Secondaries in Portfolio Construction (2019), Preqin. [4] Private Equity Secondaries: Understanding the Opportunities and Risks (2018), Cambridge Associates.
Evergreen funds, through their open-ended nature, offer lower investment minimums and higher liquidity compared to traditional closed-ended private equity funds, making private equity investment more accessible for a broader range of investors. Moreover, by investing in private equity secondaries, investors can potentially benefit from the maturity and potential discount advantages of secondaries, while still enjoying the efficient capital deployment and diversified exposure to private equity assets that evergreen funds provide.
