The Story: Return numbers are in for private equity secondaries funds, and the general report from Pitchbook is that they’ve done.. alright in 2023. Venture capital secondaries funds, however, are down big.
A private equity secondary is a pre-existing investor commitment to private equity and/or other alternative investment funds that a PE or VC firm can buy or sell, and in 2023, PE secondaries have returned positive results, but nothing spectacular. Their 1-year internal rate of return offers a decent 7.93%.
VC secondaries, however, performed very poorly at -15.2%, by far the worst among the secondaries group.
According to PitchBook fund strategies analyst Juliet Clemens, the reason PE secondaries are performing better than VC secondaries is because, “although PE assets more broadly did see write-downs, they were not as severe as the valuation drops in VC,” and that “PE portfolio companies tend to be more mature than those of venture capital, which means they are already generating cash flow.”
It’s likely that secondary performance in PE has been boosted by LPs who want liquidity now amid declining private asset valuations and a weak exit market.
Expert Take: Zach Ullman, principal at Lead Edge Capital, attributes the underperformance of VC secondaries funds to “seeing a lot more down-rounds than up-rounds in the venture capital world. And once you do that, you end up re-valuing some of these businesses.”
Ullman thinks that venture markets will return to the mean, making today a good time to be investing in venture assets. “However, the flip-side is, you don’t want to catch a proverbial falling knife.”
He expands on this:
“What’s low could potentially go lower. The approach we’ve taken in underwriting any sort of asset is to be company-first. It’s to say, ‘I’m not going to buy 100 different things, I’m buying exposure to one company, whether I’m doing a fund-level secondary or a company-level secondary.”
Ullman predicts that secondary markets will continue to be a profitable bet for private equity: “Our view internally is that secondary markets will continue to perform quite well, especially in the private markets, and I would attribute that to the discount that often occurs in some of these private market secondaries.”