Capital formation strategies and LP engagement for secondary market funds
Fundraising for secondaries funds involves articulating a value proposition distinct from primary fund investing. LPs evaluating secondaries allocations seek specific portfolio construction benefits including J-curve mitigation, vintage year diversification, and potentially accelerated distributions. The fundraising process must effectively communicate how the manager delivers these benefits while demonstrating the sourcing capabilities, valuation expertise, and operational infrastructure necessary to execute the strategy.
Successful secondaries fundraising typically emphasizes several themes that resonate with institutional LPs:
J-curve mitigation represents a primary attraction. Primary funds typically show negative returns in early years as management fees and expenses exceed unrealized appreciation. By acquiring mature fund positions, secondaries funds may begin generating distributions more quickly, reducing or eliminating this negative period. Fundraising materials often illustrate this benefit with historical data.
Vintage year diversification allows LPs to gain exposure to multiple fund vintages through a single commitment. This diversification may smooth returns across economic cycles and reduce concentration risk compared to committing to primary funds in a single year.
Potential for discount capture exists when market conditions or seller circumstances create opportunities to acquire positions below net asset value. While discounts vary significantly over time, the possibility of buying assets at attractive prices relative to primary investing resonates with value-oriented investors.
Portfolio construction efficiency appeals to LPs seeking to reach target private market allocations more quickly or to rebalance existing portfolios by adding mature exposure.
Secondaries funds attract various institutional investor types, each with different motivations:
LPs evaluating secondaries managers typically probe several areas during due diligence:
Sourcing capabilities receive significant attention. LPs want to understand how the manager identifies deal flow, relationships with intermediaries and sellers, and any proprietary sourcing advantages. Deal sourcing directly affects both opportunity quality and pricing achieved.
Valuation and underwriting processes matter given the complexity of evaluating portfolios of existing fund interests. LPs assess the team's approach to analyzing underlying positions, modeling cash flows, and determining appropriate pricing.
Transaction execution experience demonstrates the ability to navigate consent processes, transfer documentation, and closing mechanics across varied situations.
Portfolio construction discipline shows how the manager builds diversified portfolios while maintaining return focus. LPs examine concentration limits, vintage year targets, and strategy allocation guidelines.
Secondaries fund marketing typically includes:
Performance presentation requires careful attention to methodology, particularly how returns are calculated for acquired positions versus organic appreciation.
Secondaries fund terms share many features with other private equity funds while reflecting strategy-specific considerations:
Management fees often range from 1% to 1.5% on committed capital, sometimes lower than primary fund fees reflecting the different workload distribution across the fund life.
Carried interest typically follows the standard 20% structure, though hurdle rates and catch-up provisions vary. GP-led transactions may involve different economics to address potential conflicts.
Investment periods for secondaries funds are often shorter than primary funds, sometimes three to four years rather than five to six, reflecting the typically faster deployment pace.
Fund terms range from ten to twelve years with extension provisions, though actual duration depends on underlying fund lifecycles.
Some secondaries managers engage placement agents to support fundraising. Considerations include: