Liquid Gold: A Multi-Faceted Quantitative Analysis of Private Equity Secondaries

Abstract

The private equity landscape has transformed over the last decades, with unprece- dented amounts of capital raised and number of fund managers in the market. In addition to growth, the space has adapted to fit investors’ needs, reflecting its on- going evolution. However, excitement about private equity’s past returns and other benefits has led to over-commitment of capital and investment in too many funds, while also managing the underlying risk of private equity – illiquidity. This creates an opportunity for a secondary market where existing fund investors can sell their shares to a buyer, at sometimes a discount, to gain liquidity. The buyers of these shares are secondaries managers who fill their funds with a collection of these trans- actions. Secondaries, once a niche and overlooked area of investing, have become the standalone liquidity solution for existing fund investors. Prospective investors seeking private equity exposure have the option to invest in 3 types of funds: buyout, pri- maries, and secondaries. This thesis aims to analyze the performance of secondaries funds in 3 aspects. First, we analyze the historical risk-adjusted returns and utilize Markowitz’s mean-variance portfolio optimization. Our analysis indicates that the optimal portfolio would have 100% of capital in secondaries, suggesting it outper- forms the other strategies in this context. Then, we conduct a statistical analysis to determine whether investing in a secondaries fund offers quicker liquidity for its in- vestors relative to the other two strategies. While our findings reveal that secondaries do offer distributions faster than primaries, they fail to outperform buyout at statisti- cally significant levels. Finally, using Welch’s T-test and OLS regression on fund size data, we determine whether secondaries are outgrowing the other strategies. We find that secondaries are growing at a much faster rate than the other strategies, indicating the market is confident in the strategy. Overall, our analysis reveals that secondaries offer well-rounded performance in returns, liquidity, and fundraising, making it a compelling option for investors seeking additional private equity exposure.