The importance of secondary funds as part of the private equity asset class has grown significantly over the last few years.  Investors have come to appreciate the attractive investment characteristics of these funds:

• Diminished J-Curve effect. Unlike newly formed private equity partnerships (“primary funds”), secondary funds generally do not experience negative returns during the first few years after their formation (the so called “J-curve”).  Instead, the buyer is closer to the time when a fund is more likely to generate distributions, thereby, improving the ultimate return prospects.
• Lower investment risk. Secondary transactions typically occur after most of a primary fund’s investments have been identified, providing the secondary buyer with the opportunity to analyze and value specific companies in a portfolio. 
• Shorter duration. Because they avoid the first few years of a primary fund’s holding period, secondary funds offer a shorter duration than primary funds.

Secondary funds can provide investors with a diversified pool of partnership interests that not only enhances the returns of an existing portfolio of private equity investments, but also provides new investors to the asset class with an opportunity to jump start their program by seeding it with relatively mature investments.

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