In mid-June, Hamilton Lane, a private markets investment manager, closed fundraising for its Hamilton Lane Secondary Fund VI. Dedicated to investment in secondaries and with an initial target of $5 billion, the vehicle marked the firm’s highest fundraise ever with $5.6 billion. Investors in the fund ranged from public pension funds and sovereign wealth funds to private wealth platforms.
Today, the firm announced that it would give additional qualified individual investors access to Hamilton Lane Secondary Fund VI through a tokenized feeder fund on the tokenization platform Securitize, which will be available exclusively on the Polygon blockchain.
“We are excited to extend access to Secondary Fund VI, building on the historical success of our secondary platform to bring Hamilton Lane’s premier institutional secondary offering to individual investors,” said Tom Kerr, co-head of investments and global head of secondary Investments at Hamilton Lane, in a statement. “The circumstances driving appetite for liquidity via the secondary market continue to grow, and we sit in a compelling position with what we believe is one of the most experienced and cohesive secondary platforms.”
The Hamilton Lane fund is emblematic of the growing interest by investors in accessing private markets through secondary investments. Secondaries involve interests or assets sold in the secondary market by investors in traditional private markets funds such as those focusing on private equity and venture capital. The sellers can be both GPs and LPs, and the buyers can include funds as well as investors purchasing secondaries interests on their own. In an environment where private equity and venture capital shops struggle to execute more traditional fund exits such as IPOs, secondaries provide an alternative way for them to gain liquidity. Meanwhile, buyers can get exposure to attractive assets at lower risk and possibly at a discount while seeing returns within a shorter period than they would while investing in a traditional private markets fund. It’s also a way to achieve vintage diversification by accessing private market deals further into their execution strategies to supplement any investments in brand-new deals.
In the first quarter of 2024, global secondaries fundraising reached $35 billion, according to private markets research firm PitchBook. The figure represented a 6% increase over the same period last year and marked the sector’s highest fundraising quarter since 2008. Investment banking firm Evercore reported that in 2023, secondaries transaction volume reached $114 billion, representing a 9% increase from the year before. In that sum, $63 billion involved LP-led and $51 billion GP-led transactions. The vast majority of the transactions (75%) involved investment in buyout assets, with the remainder split between energy/infrastructure assets (7%), credit (5%), growth and venture assets (both 4%) and other types of unidentified assets (5%).
Meanwhile, investment banking firm Jeffries found that while pricing on LP-led secondaries transactions rebounded from previous years, it still averaged 85% of net asset value. Last year, the most attractive pricing could be found on assets involving venture funds (68% of NAV) and real estate (71% of NAV).
“The market itself has grown so much that there is more data now to assess the size of the secondary market,” said Kunal Shah, managing director and head of private market research and model portfolios with alternative investment platform iCapital. “It’s grown to over $100 billion of transaction volume for at least three years now. We know that there is a good amount of transactions that are happening, leading to more awareness of the secondary market.”
In the second quarter of 2024, secondaries and co-investment funds on iCapital's platform saw the most demand from users in the private equity category, representing 34% of all private equity inflows on the platform. The figure was below the 42% of inflows secondaries and co-investment funds reached in 2023, but significantly higher than the 16% of activity they represented in 2022.
As private equity and venture capital dealmaking has slowed, secondaries have provided an attractive alternative for investment in private markets over the past few years, according to John Kemmerer, vice president and head of private equity with Sequoia Financial Group, a financial planner with $19.3 billion in AUM. Over the course of a full market cycle, secondaries can provide higher returns than public equities, he noted.
Sequoia Financial Group has invested in continuation funds, which fall under the category of GP-led secondaries, and completed some direct investments in secondaries involving single companies; it has stayed away from LP-led transactions. Kemmerer said that secondaries comprise only a very small percentage of Sequoia’s overall allocation to alternatives. Even in private equity and venture capital categories, up to 90% of Sequoia’s investments have continued to be made through primary funds. Nevertheless, secondaries have “been a great source of opportunities in the last three years when more traditional deal activity in private equity and venture has been muted,” he noted. “Transactional volume has gone down in traditional financings and opportunities there, and that has driven increased activity in the secondary market. It’s been a nice complement to primary transactions in private equity and venture.”
There are fundamental reasons for investors’ increasing interest in secondaries, according to Shah and other private markets experts WealthManagement.com spoke with. The secondaries market, which initially emerged to help distressed investors sell assets at a discount and regain liquidity, has undergone a transformation in recent years. It is no longer seen as a refuge for distressed sellers but as a way for investors to potentially buy into attractive assets that otherwise might have been hard to access and achieve multiple portfolio goals, ranging from diversification to risk management. For example, secondaries eliminate the “blind pool risk” inherent in investing in newly formed private equity funds with no existing assets, according to Ryan Cooney, managing director of the secondary investment team at Hamilton Lane.
Meanwhile, the diversification that comes with investment in secondaries works on multiple levels, ranging from diversification across vintages to diversification across industries and companies to diversification across geographies, noted Jon McEvoy, co-head of private wealth secondaries solutions distribution with Coller Capital, an investment firm that specializes in secondary assets.
“These portfolios can have hundreds, multiple hundreds or even sometimes, depending on the size of the fund, thousands of underlying assets,” said Juliet Clemens, fund strategies research analyst with PitchBook. “You do get that diversification benefit. You also can manage your cash flow timing. So, if you wanted to invest in something, not at year one, but maybe at year three, five, or seven, it gives you that flexibility to do that.”
An investor who commits money to a private equity or venture capital fund will typically be unable to access those funds for a decade or more. Secondaries funds, however, have a much shorter time to exit, sometimes only two or three years, depending on at what point in the life cycle of the primary fund investors buy in.
In addition, investment in secondaries features almost no J-curve or capital calls, which may be very attractive to RIAs and less experienced investors, according to Shah. Shah added that even when he worked with institutional clients in the past, if they were new to private markets, they tended to start with investment in secondaries for those reasons.
Overall, secondaries provide an attractive risk-adjusted return compared to traditional private equity funds, though the cash-on-cash return tends to be more conservative, Shah said.
Clemens said the IRR on private equity investments in the first quarter averaged 10.4%, while the IRR on secondaries averaged 4.6%. She also noted that last year, investors in GP-led secondaries targeted net multiples of about 2.1x, while those investing in LP-led secondaries were looking at net multiples of about 1.6x or 1.7x.
Evergreens Enter the Picture
With the market evolving over recent quarters, more asset managers have launched evergreen funds dedicated exclusively to secondary investments. For example, in February, Coller Capital announced the launch of Coller Secondaries Private Equity Opportunities Fund (C-SPEF), a tender offer fund that will target secondaries on behalf of accredited investors. The fund comes with investment minimums of $50,000 and 1099 tax reporting. By launching a 40 Act fund that came with these features, Coller wanted to provide a “user-friendly” structure for high-net-worth investors and financial advisors, McEvoy said.
“Investing in secondaries was conducive for the semi-liquid perpetual offerings,” said McEvoy. “By moving into the private wealth space, we wanted to expand our platform to offer a structure that would be more conducive for clients that are not qualified purchasers, clients that are accredited at lower minimums. And ultimately a structure that would be more user-friendly.”
Hamilton Lane’s Secondary Fund VI is structured as a limited partnership rather than a 40 Act fund, which means it’s not exclusively targeted toward individual investors. Its minimum investment is also on the heftier side at $5 million. However, according to Cooney, the fund has seen substantial interest from financial advisors.
“I can say in this most recent fund, that’s an area of our investor base that has grown and expanded,” Cooney said. “And we are certainly seeing increased allocations in private markets and into secondaries from the private wealth channel.”
Hamilton Lane’s partnership with Securitize for the tokenized feeder fund means that investors can now participate in Secondary Fund VI with minimums of $20,000 rather than $5 million.
Hamilton Lane wouldn’t disclose the returns it’s targeting. Still, Cooney said the firm aims for the bulk of the returns to come from asset appreciation post-purchase rather than from any discounts the fund manages to negotiate on new acquisitions.
In addition, in June, Berlin-based asset manager Moonfare, which recently opened a U.S. office, launched a semi-liquid fund focused on secondaries. The fund is currently not open to U.S.-based investors.
“Given how many people are launching new secondary funds, whether they are closed-end or not, there is a ton of interest here,” said Clemens. Furthermore, “What’s nice about the current market is that you’ve got plenty of managers launching just LP-led secondary funds, just GP-led transactions, and sometimes a mix of both. It really will depend on your risk tolerance and how much you are really targeting in terms of net returns.”
What’s the Catch?
Secondaries may not be the right option for every investor. According to Kemmerer, they can offer a great entry into private markets for those who are new to alternatives and might be reassured to have their allocations start yielding returns within the space of a few years. For more seasoned investors, like those Sequoia Financial Group tends to work with, the more important objective might be to keep their money invested and working for them over the long term.
“With some permutations of secondaries you might get most or all of your money back quickly, and then you don’t have that much money working. The money comes back quicker, and it’s a little more work to maintain your allocation at the level you want it to be,” Kemmerer noted. “One 'flavor' of secondaries involves buying something at 80 cents and hoping you get a dollar relatively quickly. We’d rather buy something at a dollar and hope we get two dollars, and maybe it takes a little longer.”
Investors must also be careful which asset managers they choose to work with. Cooney noted that barriers to entry for new funds into the secondaries space remain high. For example, that $35 billion fundraising in the first quarter was spread across only 10 funds. One of them, Lexington Capital Partners X, accounted for almost 65% of the volume, according to PitchBook. Cooney said an experienced investment team is not enough to execute a successful secondaries strategy. Asset managers need to have existing relationships to get first dibs on off-the-market deals and access to information on how the assets in a secondary offering might be performing to make good bets.
Shah agreed that the secondary market is fairly efficient—if a deal comes online, most potential buyers will know it. As a result, to outperform in that space, he noted that a manager needs to have some clear advantage over competitors, be it sourcing capabilities or a better platform.
“There are really good secondary firms, and they all see some of the same deals. If you look at the performance of secondary markets, they all have behaved more or less similarly,” Shah said. “So, the question for investors is which one you believe will continue to have advantages consistently over 10-plus years and with whom you can deploy capital over two, three, four different fundraising cycles?”
