In mid-June, Hamilton Lane, a non-public markets funding supervisor, closed fundraising for its Hamilton Lane Secondary Fund VI. Devoted to funding in secondaries and with an preliminary goal of $5 billion, the car marked the agency’s highest fundraise ever with $5.6 billion. Buyers within the fund ranged from public pension funds and sovereign wealth funds to non-public wealth platforms.
Right now, the agency introduced that it will give further certified particular person buyers entry to Hamilton Lane Secondary Fund VI by means of a tokenized feeder fund on the tokenization platform Securitize, which shall be out there solely on the Polygon blockchain.
“We’re excited to increase entry to Secondary Fund VI, constructing on the historic success of our secondary platform to convey Hamilton Lane’s premier institutional secondary providing to particular person buyers,” mentioned Tom Kerr, co-head of investments and world head of secondary Investments at Hamilton Lane, in a press release. “The circumstances driving urge for food for liquidity through the secondary market proceed to develop, and we sit in a compelling place with what we consider is among the most skilled and cohesive secondary platforms.”
The Hamilton Lane fund is emblematic of the rising curiosity by buyers in accessing non-public markets by means of secondary investments. Secondaries contain pursuits or property bought within the secondary market by buyers in conventional non-public markets funds comparable to these specializing in non-public fairness and enterprise capital. The sellers will be each GPs and LPs, and the patrons can embrace funds in addition to buyers buying secondaries pursuits on their very own. In an atmosphere the place non-public fairness and enterprise capital outlets wrestle to execute extra conventional fund exits comparable to IPOs, secondaries present an alternate manner for them to realize liquidity. In the meantime, patrons can get publicity to enticing property at decrease danger and presumably at a reduction whereas seeing returns inside a shorter interval than they might whereas investing in a conventional non-public markets fund. It’s additionally a option to obtain classic diversification by accessing non-public market offers additional into their execution methods to complement any investments in brand-new offers.
Within the first quarter of 2024, world secondaries fundraising reached $35 billion, based on non-public markets analysis agency PitchBook. The determine represented a 6% improve over the identical interval final yr and marked the sector’s highest fundraising quarter since 2008. Funding banking agency Evercore reported that in 2023, secondaries transaction quantity reached $114 billion, representing a 9% improve from the yr earlier than. In that sum, $63 billion concerned LP-led and $51 billion GP-led transactions. The overwhelming majority of the transactions (75%) concerned funding in buyout property, with the rest cut up between power/infrastructure property (7%), credit score (5%), development and enterprise property (each 4%) and different forms of unidentified property (5%).
In the meantime, funding banking agency Jeffries discovered that whereas pricing on LP-led secondaries transactions rebounded from earlier years, it nonetheless averaged 85% of internet asset worth. Final yr, probably the most enticing pricing could possibly be discovered on property involving enterprise funds (68% of NAV) and actual property (71% of NAV).
“The market itself has grown a lot that there’s extra knowledge now to evaluate the dimensions of the secondary market,” mentioned Kunal Shah, managing director and head of personal market analysis and mannequin portfolios with different funding platform iCapital. “It’s grown to over $100 billion of transaction quantity for at the very least three years now. We all know that there’s a good quantity of transactions which can be occurring, resulting in extra consciousness of the secondary market.”
Within the second quarter of 2024, secondaries and co-investment funds on iCapital’s platform noticed probably the most demand from customers within the non-public fairness class, representing 34% of all non-public fairness inflows on the platform. The determine was under the 42% of inflows secondaries and co-investment funds reached in 2023, however considerably larger than the 16% of exercise they represented in 2022.
As non-public fairness and enterprise capital dealmaking has slowed, secondaries have supplied a pretty different for funding in non-public markets over the previous few years, based on John Kemmerer, vice chairman and head of personal fairness with Sequoia Monetary Group, a monetary planner with $19.3 billion in AUM. Over the course of a full market cycle, secondaries can present larger returns than public equities, he famous.
Sequoia Monetary Group has invested in continuation funds, which fall beneath the class of GP-led secondaries, and accomplished some direct investments in secondaries involving single firms; it has stayed away from LP-led transactions. Kemmerer mentioned that secondaries comprise solely a really small proportion of Sequoia’s total allocation to options. Even in non-public fairness and enterprise capital classes, as much as 90% of Sequoia’s investments have continued to be made by means of major funds. Nonetheless, secondaries have “been an important supply of alternatives within the final three years when extra conventional deal exercise in non-public fairness and enterprise has been muted,” he famous. “Transactional quantity has gone down in conventional financings and alternatives there, and that has pushed elevated exercise within the secondary market. It’s been a pleasant complement to major transactions in non-public fairness and enterprise.”
There are elementary causes for buyers’ growing curiosity in secondaries, based on Shah and different non-public markets specialists WealthManagement.com spoke with. The secondaries market, which initially emerged to assist distressed buyers promote property at a reduction and regain liquidity, has undergone a change in recent times. It’s not seen as a refuge for distressed sellers however as a manner for buyers to doubtlessly purchase into enticing property that in any other case might need been onerous to entry and obtain a number of portfolio targets, starting from diversification to danger administration. For instance, secondaries get rid of the “blind pool danger” inherent in investing in newly fashioned non-public fairness funds with no current property, based on Ryan Cooney, managing director of the secondary funding crew at Hamilton Lane.
In the meantime, the diversification that comes with funding in secondaries works on a number of ranges, starting from diversification throughout vintages to diversification throughout industries and firms to diversification throughout geographies, famous Jon McEvoy, co-head of personal wealth secondaries options distribution with Coller Capital, an funding agency that focuses on secondary property.
“These portfolios can have lots of, a number of lots of and even typically, relying on the dimensions of the fund, 1000’s of underlying property,” mentioned Juliet Clemens, fund methods analysis analyst with PitchBook. “You do get that diversification profit. You can also handle your money move timing. So, should you wished to put money into one thing, not at yr one, however possibly at yr three, 5, or seven, it offers you that flexibility to do this.”
An investor who commits cash to a non-public fairness or enterprise capital fund will usually be unable to entry these funds for a decade or extra. Secondaries funds, nonetheless, have a a lot shorter time to exit, typically solely two or three years, relying on at what level within the life cycle of the first fund buyers purchase in.
As well as, funding in secondaries options nearly no J-curve or capital calls, which can be very enticing to RIAs and fewer skilled buyers, based on Shah. Shah added that even when he labored with institutional purchasers up to now, in the event that they have been new to non-public markets, they tended to begin with funding in secondaries for these causes.
General, secondaries present a pretty risk-adjusted return in comparison with conventional non-public fairness funds, although the cash-on-cash return tends to be extra conservative, Shah mentioned.
Clemens mentioned the IRR on non-public fairness investments within the first quarter averaged 10.4%, whereas the IRR on secondaries averaged 4.6%. She additionally famous that final yr, buyers in GP-led secondaries focused internet multiples of about 2.1x, whereas these investing in LP-led secondaries have been internet multiples of about 1.6x or 1.7x.
Evergreens Enter the Image
With the market evolving over current quarters, extra asset managers have launched evergreen funds devoted solely to secondary investments. For instance, in February, Coller Capital introduced the launch of Coller Secondaries Non-public Fairness Alternatives Fund (C-SPEF), a young provide fund that may goal secondaries on behalf of accredited buyers. The fund comes with funding minimums of $50,000 and 1099 tax reporting. By launching a 40 Act fund that got here with these options, Coller wished to offer a “user-friendly” construction for high-net-worth buyers and monetary advisors, McEvoy mentioned.
“Investing in secondaries was conducive for the semi-liquid perpetual choices,” mentioned McEvoy. “By shifting into the non-public wealth area, we wished to broaden our platform to supply a construction that may be extra conducive for purchasers that aren’t certified purchasers, purchasers which can be accredited at decrease minimums. And in the end a construction that may be extra user-friendly.”
Hamilton Lane’s Secondary Fund VI is structured as a restricted partnership reasonably than a 40 Act fund, which implies it’s not solely focused towards particular person buyers. Its minimal funding can also be on the heftier aspect at $5 million. Nonetheless, based on Cooney, the fund has seen substantial curiosity from monetary advisors.
“I can say on this most up-to-date fund, that’s an space of our investor base that has grown and expanded,” Cooney mentioned. “And we’re actually seeing elevated allocations in non-public markets and into secondaries from the non-public wealth channel.”
Hamilton Lane’s partnership with Securitize for the tokenized feeder fund signifies that buyers can now take part in Secondary Fund VI with minimums of $20,000 reasonably than $5 million.
Hamilton Lane wouldn’t disclose the returns it’s concentrating on. Nonetheless, Cooney mentioned the agency goals for the majority of the returns to return from asset appreciation post-purchase reasonably than from any reductions the fund manages to barter on new acquisitions.
As well as, in June, Berlin-based asset supervisor Moonfare, which not too long ago opened a U.S. workplace, launched a semi-liquid fund targeted on secondaries. The fund is at present not open to U.S.-based buyers.
“Given how many individuals are launching new secondary funds, whether or not they’re closed-end or not, there’s a ton of curiosity right here,” mentioned Clemens. Moreover, “What’s good concerning the present market is that you just’ve acquired loads of managers launching simply LP-led secondary funds, simply GP-led transactions, and typically a mixture of each. It actually will rely in your danger tolerance and the way a lot you might be actually concentrating on by way of internet returns.”
What’s the Catch?
Secondaries will not be the precise choice for each investor. In keeping with Kemmerer, they’ll provide an important entry into non-public markets for many who are new to options and could be reassured to have their allocations begin yielding returns throughout the area of some years. For extra seasoned buyers, like these Sequoia Monetary Group tends to work with, the extra necessary goal could be to maintain their cash invested and dealing for them over the long run.
“With some permutations of secondaries you would possibly get most or your whole a reimbursement shortly, and then you definately don’t have that a lot cash working. The cash comes again faster, and it’s slightly extra work to keep up your allocation on the degree you need it to be,” Kemmerer famous. “One ‘taste’ of secondaries entails shopping for one thing at 80 cents and hoping you get a greenback comparatively shortly. We’d reasonably purchase one thing at a greenback and hope we get two {dollars}, and possibly it takes slightly longer.”
Buyers should additionally watch out which asset managers they select to work with. Cooney famous that boundaries to entry for brand spanking new funds into the secondaries area stay excessive. For instance, that $35 billion fundraising within the first quarter was unfold throughout solely 10 funds. Certainly one of them, Lexington Capital Companions X, accounted for nearly 65% of the amount, based on PitchBook. Cooney mentioned an skilled funding crew is just not sufficient to execute a profitable secondaries technique. Asset managers must have current relationships to get first dibs on off-the-market offers and entry to info on how the property in a secondary providing could be performing to make good bets.
Shah agreed that the secondary market is pretty environment friendly—if a deal comes on-line, most potential patrons will understand it. In consequence, to outperform in that area, he famous {that a} supervisor must have some clear benefit over opponents, be it sourcing capabilities or a greater platform.
“There are actually good secondary corporations, and so they all see among the similar offers. Should you have a look at the efficiency of secondary markets, all of them have behaved kind of equally,” Shah mentioned. “So, the query for buyers is which one you consider will proceed to have benefits persistently over 10-plus years and with whom you possibly can deploy capital over two, three, 4 totally different fundraising cycles?”