Why Direct when you can invest in Secondaries?

Question

Why would anyone invest in a Direct PE fund when you can invest in Secondaries? The reason I ask is because I've consistently seen Secondaries outperform Direct funds on an IRR-basis (thx j-curve mitigation). There also seems to be significantly less risk given that a Secondary investor holds insight re the performance of the actual portfolio companies before tossing money into a position.

Do Direct funds outperform these Secondaries on a cash-on-cash basis? That seems to be the only explanation I can think of. I'm really curious to understand if there's any other explanation, or if my assumption is simply not true...

Do Direct funds outperform these Secondaries on a cash-on-cash basis? That seems to be the only explanation I can think of.

neil88 · Accepted Answer

You are correct in that two of the primary benefits of investing in a secondary fund is the j-curve mitigation and the lack of blind pool risk. 
But your MOIC is always going to be lower in a secondary fund compared to a direct fund, unless you lever your position.  Take Fund ABC, a 5 year fund which is currently at 1.35x. You expect the final MOIC to be ~1.8x.

neil88 · Answer

Actually, premier flagship funds are traded more than smaller, lesser known funds (this only applies to PE, not VC). Generally speaking, larger funds are traded more because they have a larger set of LPs. People sell today for a variety of reasons but the most common one is portfolio construction. 
In Q4 2018, we saw a number of larger Canadian (Ontario Teachers, PSP, CPP, Caisse) and some US pension plans transact in strip sales of their portfolio (where your not selling your entire position in a fund but just a piece).

+25	Clearlake raises a $14.8B fund	21	3h
+20	PE Portfolio Management/Ops - pros and cons	1	12h
+18	Mid Level Career Freeze	0	1h
+12	Left PE for an operating role and starting to regret it	0	1h
+12	Does Asset-Based Finance Get Carry?	1	1d
+11	Best Path to PE from BB Coverage w/ Outsourced Modeling	3	3m
+11	Interest equalization in a fund, how to calculate.	3	8h
+9	Anyone Else Getting Outbid on Every Deal Lately?	6	3d
+9	BB Analyst Not Promoted – How Should I Position This to Headhunters?	1	21h
+9	Best way to meet ppl as a PE Associate in NYC	4	2d

1	redever	99.2
2	Secyh62	99.0
3	BankonBanking	99.0
4	kanon	99.0
5	Betsy Massar	98.9
6	DrApeman	98.9
7	dosk17	98.9
8	CompBanker	98.9
9	GameTheory	98.9
10	Mimbs	98.8

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

Why Direct when you can invest in Secondaries?

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

Why Direct when you can invest in Secondaries?

Trending Content - Private Equity Forum