The secondary market is booming and the transactions reached $60 billion in 2017. A combined $40 billion was raised by the closing of secondary market investments by thirty-five funds. A large pool of money is poured by the fund managers and pension funds. The secondary market is used majorly to sell taking into account a lot of important factors like liquidity and portfolio management.
Not limited to this, even as the Q2 draws to a close in 2018, the median net Internal Rate of Return (IRR) is estimated to be 15.8%. Moreover, secondaries are already looking forward to an investment of $30 billion. The advantages of a secondary market investment over a primary one lie in the fact that with the former you are associated with funds which have already employed a great deal of capital. You have the chance to analyze the assets which the managers have bought. Also, you can leverage a lot of information and data about the secondary market investment portfolio.
With primary fund investments, you have to blindly trust the managers at the start and then be totally dependent on them and their sound knowledge and judgment to invest your money. Investment in the private equity industry can be a tricky affair. For example, you might get into the trap of discounts or freebies. An individual portfolio sold at discounts or lower than their earlier stated price might not be as good as instruments being sold at the NAV (Net Asset Value) or above it.
Don’t get trapped in the booby trap of such instruments but try ascertaining through a due-diligence approach as to where you need to invest. Analyze every individual company in your portfolio, do your research, check Google. Ask friends and relatives and don’t shy away from seeking professional advice from financial experts. Check for experts who know their work in information, portfolio management, and underwriting services.
Heed attention to business fundamentals, the structure of the portfolio company, industry, asset valuation, fund structure, and individual company performance. A crucial factor in investing in secondary market instruments is understanding the complexities of the effectiveness of a fund manager by their analysis and their legal documents.
The reason why the private equity industry has taken a liking to the secondary market investment instrument is a private equity fund sees a marked improvement in the IRR profile through them. It allows investors to be included in the fund at a later point of time when cash distribution is being made to investors. It also offsets cash outflows which are related to capital calls.
There are a lot of attributes that you need to check before you start investing in any secondary market derivatives. Check all these parameters beforehand. Be sure of your investment and the products and services you are dealing in. When all of these has been checked off the list, then, nothing can stop you from investing for long terms and getting a good deal out of it.