After investing client assets in private equity for more than 25 years, I\u2019ve come to believe that one of the biggest advantages of evergreen secondary funds is also one of the least understood.<\/p>\n
Secondary funds purchase existing private equity investments from institutions that want liquidity, often a pension fund or an endowment, selling a stake for reasons that have nothing to do with performance, such as rebalancing. These sales often occur at discounts to their position\u2019s most recently reported net asset values. When a buyer acquires those assets, it captures the benefit of purchasing quality investments below their NAV. The underlying companies haven\u2019t changed. The gain comes purely from the price paid.<\/p>\n
Imagine a $250 million evergreen fund that raises $100 million in new capital over a four-month period and deploys it into secondary positions at a 20% discount. That new investment controls roughly $125 million in underlying assets, creating $25 million of immediate value for the fund, before any change in the performance or valuation of the underlying companies. From the perspective of a hypothetical investor, a $100,000 investment would be worth $107,140 in four months. That\u2019s why I believe the earliest investors in a new evergreen secondary fund may capture a disproportionate share of the initial NAV lift while the fund is relatively small. Inside a $3 billion fund, the identical transaction barely moves the needle. The same $100,000 investment would be worth $100,800.<\/p>\n