Are Private Equity Secondaries Worth the Hype: Quantitative Analysis on Secondaries Performance and J-Curve Mitigation

Abstract

In the past several decades, we have seen the rise of alternative investments in portfolio construction, especially an overall increase in private equity allocations. As the traditional private equity primary market became more saturated with dry powder, private equity secondaries began to gain more traction in the recent years. Many claim that private equity secondaries have the benefits of proving liquidity to both GPs and LPs, accelerated cash back, lower volatility, higher average internal rate of return (IRR), and a shorter J-Curve. This thesis aims to test some of the claims listed above and test if private equity secondaries are worth their current popularity. The first part of this thesis aims to investigate the performance and J-Curves of private equity secondaries and compare those with the same metrics of private equity buyout funds and venture capital funds. For performance analysis, this thesis would utilize Welch’s T-Test to compare the following four metrics across buyout, venture capital, and secondaries funds: internal rate of return (IRR), multiple on invested capital (MOIC), distribution to paid-in ratio (DPI), and total value to paid-in ratio (TVPI). For the J-Curve analysis, this thesis would conduct Monte Carlo simulation based on historical net cash flow for 2011 vintage funds. Through the simulation, we conclude that compared with buyout and venture capital funds, secondaries have a shorter J-Curve. The second part of this thesis aims to test secondaries fund make up in a portfolio construction context. In this part of the thesis, I aim to build a simple portfolio using three return proxies for buyout, venture capital, and secondaries funds and perform mean variance portfolio optimization under different utility assumptions.