Identifying High-Quality Secondary Funds
A high-quality secondary fund will be independent and free from conflicts of interest (avoid bank-sponsored funds, where conflicts are virtually limitless), and will have an extensive database of funds and underlying investments that permit them to model out the potential value of each underlying investment. Deal sourcing is also an important consideration: Sometimes, strong relationships with general partners will provide access to transactions without a lot of competition. The reputation of the secondary fund manager for timely evaluation, discretion, and execution can be key to driving opportunities.
As advisors, we will naturally want to build out a diversified portfolio of PE investments for our clients. Thus, we will diversify by buying venture capital, buyouts, mezzanine, and opportunistic funds. We will diversify by industry sector (tech, etc.) and by PE manager. We will diversify by vintage year. And, of course, we will diversify by adding secondary investments on an opportunistic basis, when secondary pricing is attractive.
Note, however, that a secondary investment is only a secondary on the day it is bought. After that, it's simply a PE investment that can be categorized as venture, buyout, or whatever. Categorizing these funds as secondaries doesn't tell us anything useful about our clients' overall exposures to PE.11 (On the other hand, of course, we will want to note which investments were acquired as secondaries so that we can calculate how successful our secondary program is.)