Private Equity Secondaries: It’s Not About Timing

Private Equity Secondaries: It’s Not About Timing

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Private equity secondary funds have a track record of strong performance across different market conditions, indicating that their success generally doesn’t depend on timing.

Key takeaways

We show that over the last few decades, private equity secondaries have... 

  • outperformed global equities over every full market cycle (as measured by rolling 10-year periods), regardless of the time of initial investment. 
  • surpassed public stocks in periods of both rate hikes and rate cuts. 
  • protected better than primary private equity and public equity during deep public market drawdowns.

Although secondaries are a form of equity and private investing, they are distinct from both primary private equity (PE) funds and public stocks. Nonetheless, we believe many investors regard their performance as comparable. 

To illustrate the differences in returns, we compared the performance of private equity secondary funds to global public equities and primary private equity funds over several decades. This comparison— across various market cycles, within different interest rate environments and during deep public market drawdowns—demonstrates both the resilience and consistency of secondary PE strategies.

Consistent long-term performers

Over trailing 3-year periods between 2003 and 2023, secondaries outperformed global public equities in 17 out of 18 observations. Over trailing 10-year periods, roughly representing a full market cycle, private equity secondaries outperformed in every instance (Exhibit 1).

Exhibit 1: Secondaries have outperformed public equities in both the short and long term
Trailing 3-year relative performance vs. global equities
Exhibit 1: Secondaries have outperformed public equities in both the short and long term
Trailing 10-year relative performance vs. global equities
Trailing 10-year relative performance vs. global equities

As of 12/31/23. Source: Cambridge Associates and MSCI World Index. The Cambridge Secondary Funds Index, which represents secondaries, uses a horizon calculation based on data compiled from 334 secondary funds, including fully liquidated partnerships, formed between 1991 and 2023. Data represent annualized performance difference of the Cambridge Secondary Funds Index and the MSCI World Index over 3-year and 10-year trailing periods. See back page for index definitions and additional disclosures.

Less affected by rate moves

There have been five interest rate cycles consisting of a series of consecutive interest rate moves by the Federal Reserve since 2003—two periods of cuts and three of hikes. Private equity secondaries handily beat global stocks in each of these cycles, regardless of the direction of the rate move (Exhibit 2). 

Moreover, the number of rate changes within each cycle did not impact the trend. For example, secondaries had an annualized return of around 24% during the 10 rate cuts from 3Q07 through 4Q08 and 19% during the five from 3Q19 through 1Q20, even though the two moves were substantially different in magnitude. 

Why have secondary private equity funds exhibited greater resilience to interest rate fluctuations? Generally, private investments experienced lower variability in returns than public markets, which were subject to daily fluctuations. In addition, secondary fund managers often included interest rate variability in their underwriting to potentially minimize the effects of rate moves on returns. Secondaries also benefited from the underlying managers’ ability to delay or expedite exits based on prevailing market conditions, unlike public equities, which remained invested at all times. This agility further shielded secondary PE funds from the impacts of rate changes.

Exhibit 2: Secondaries have outshined public equities in periods of both rising and falling rates
Exhibit 2: Secondaries have outshined public equities in periods of both rising and falling rates

As of 12/31/23. Source: Cambridge Associates, MSCI, St. Louis Fed, Voya IM. Data represent performance of the Cambridge Secondary Funds Index (secondaries) and the MSCI World Index (global equities), annualized from quarterly returns over each rate cycle. See back page for index definitions and additional disclosures.

Protect on the downside

We believe secondaries also have a return advantage over primary PE funds for two reasons: Secondaries have shorter holding periods since they buy later in a fund’s life, and assets are often purchased at discounts.

Additionally, secondaries have a demonstrated history of delivering downside protection in times of market stress. Since 1999, secondary funds have consistently outperformed primary private equity and public equity during deep public market downturns (Exhibit 3). 

We cannot predict how secondaries will perform during the next cycle or during the next interest rate move, or against primary peers. However, the resilience of private equity secondaries over the past few decades—through various major events such as the Great Recession, an extended bull market, and a global pandemic, along with “to be expected” economic fluctuations—suggests they may manage economic and market volatility and deliver consistent outcomes. In other words, secondary fund investing is not about timing.

Exhibit 3: Secondaries have offered better downside protection during market stress
Comparison with primary private and public equity funds during the worst U.S. market drawdowns since 1999
Secondaries have offered better downside protection during market drawdowns

As of 12/31/23. Source: Pomona Capital, Capital IQ (S&P), Cambridge Associates (CA Index). Data show cumulative quarterly returns during drawdown periods from 1999 to 2023. Past performance is not an indication of future performance. There is no guarantee that an investment in a Pomona-sponsored fund will ultimately be profitable. See index descriptions in disclosures.

To learn more about the Pomona Investment Fund, contact your Voya rep or visit PomonaInvestmentFund.com.

 

A note about risk 

Investing in private equity is a risk and there is no guarantee that an investment in private equity or in a Pomona-sponsored fund will be profitable. The above scenarios are for illustrative purposes only and are theoretical; there is no guarantee an investment in a Pomona-sponsored fund will exhibit any of the above characteristics or return profile. 

Discussed below are the investments generally made by Investment Funds and the principal risks that the Adviser and the Fund believe are associated with those investments and with direct investments in operating companies. These risks will, in turn, have an effect on the Fund. In response to adverse market, economic or political conditions, the Fund may invest in investment grade fixed income securities, money market instruments and affiliated or unaffiliated money market funds or may hold cash or cash equivalents for liquidity or defensive purposes, pending investment in longer-term opportunities. In addition, the Fund may also make these types of investments pending the investment of assets in Investment Funds and Co-Investment Opportunities or to maintain the liquidity necessary to effect repurchases of Shares. When the Fund takes a defensive position or otherwise makes these types of investments, it may not achieve its investment objective. 

The value of the Fund’s total net assets is expected to fluctuate in response to fluctuations in the value of the Investment Funds, direct investments and other assets in which the Fund invests. An investment in the Fund involves a high degree of risk, including the risk that the Shareholder’s entire investment may be lost. The Fund’s performance depends upon the Adviser’s selection of Investment Funds and direct investments in operating companies, the allocation of offering proceeds thereto, and the performance of the Investment Funds, direct investments, and other assets. The Investment Funds’ investment activities and investments in operating companies involve the risks associated with private equity investments generally. Risks include adverse changes in national or international economic conditions, adverse local market conditions, the financial conditions of portfolio companies, changes in the availability or terms of financing, changes in interest rates, exchange rates, corporate tax rates and other operating expenses, environmental laws and regulations, and other governmental rules and fiscal policies, energy prices, changes in the relative popularity of certain industries or the availability of purchasers to acquire companies, and dependence on cash flow, as well as acts of God, uninsurable losses, war, terrorism, earthquakes, hurricanes or floods and other factors which are beyond the control of the Fund or the Investment Funds. Unexpected volatility or lack of liquidity, such as the general market conditions that prevailed in 2008, could impair the Fund’s performance and result in its suffering losses. The value of the Fund’s total net assets is expected to fluctuate. To the extent that the Fund’s portfolio is concentrated in securities of a single issuer or issuers in a single sector, the investment risk may be increased. The Fund’s or an Investment Fund’s use of leverage is likely to cause the Fund’s average net assets to appreciate or depreciate at a greater rate than if leverage were not used. 

The Fund is a non-diversified, closed-end management investment company with limited performance history that a Shareholder can use to evaluate the Fund’s investment performance. The Fund may be unable to raise substantial capital, which could result in the Fund being unable to structure its investment portfolio as anticipated, and the returns achieved on these investments may be reduced as a result of allocating all of the Fund’s expenses over a smaller asset base. The initial operating expenses for a new fund, including start-up costs, which may be significant, may be higher than the expenses of an established fund. The Investment Funds may, in some cases, be newly organized with limited operating histories upon which to evaluate their performance. As such, the ability of the Adviser to evaluate past performance or to validate the investment strategies of such Investment Funds will be limited. In addition, the Adviser has not previously managed the assets of a closed-end registered investment company. 

Closed-End Fund; Liquidity Risks: The Fund is a non-diversified closed-end management investment company designed principally for long-term investors and is not intended to be a trading vehicle. An investor should not invest in the Fund if the investor needs a liquid investment. Closed-end funds differ from open-end management investment companies (commonly known as mutual funds) in that investors in a closed-end fund do not have the right to redeem their shares on a daily basis at a price based on net asset value.

IM3790881

Cambridge Associates Private Equity Index. The “Cambridge Associates Private Equity Index and Benchmark Statistics” represents the horizon calculation based on data compiled from 2,755 private equity funds, including fully liquidated partnerships, formed between 1986 and 2023. The investments within each Pomona fund and the corresponding performance volatility thereof may differ significantly from the securities that comprise the Cambridge Index, which may contain strategies and asset types Pomona does not utilize. The Cambridge Index has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is shown as a comparison to that of a well-known and widely recognized index in the private funds industry. The Cambridge Index is not subject to any of the fees and expenses to which any Pomona fund would be subject and no fund sponsored by Pomona Capital will attempt to replicate the performance of the Cambridge Index. Pomona does not pay any fees to Cambridge Associates to be ranked.

MSCI World Index: The “MSCI World Index” is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. (https://www.msci.com/world) while Pomona’ focuses on primarily purchasing secondary interests in private equity funds. The MSCI World Index has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is shown as a comparison to that of a well-known and widely recognized index. The MSCI World Index is not subject to any of the fees and expenses to which any Pomona fund would be subject and no fund sponsored by Pomona Capital will attempt to replicate the performance of the MSCI World Index.

The Cambridge Secondary Funds Index is based on unaudited quarterly performance data compiled from 334 secondary funds (excluding hard assets funds), including fully liquidated partnerships, formed between 1991 and 2023. The index has limitations (some of which are typical to other widely used indices) and cannot be used to predict performance of the Fund. These limitations include: 

1. Survivorship bias (the returns of the index may not be representative of all secondary funds in the universe because of the tendency of lower performing funds to not report returns to the index); 

2. Lack of transparency (the specific funds that are included in this index are not disclosed by Cambridge Associates, and therefore cannot be independently verified);   

3. Heterogeneity (not all secondary funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and 

4. Limited data (many funds do not report to indices, and the index may omit funds, the inclusion of which might significantly affect the performance shown). 

The index does not represent the Fund’s performance, and has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is provided to allow for comparison to that of certain well-known and widely recognized indices. Further, as Cambridge Associates recalculates the index each time a new fund is added, the historical performance of this index is not fixed, cannot be replicated, and differs over time from the data presented in this communication. See Cambridge Associates for a complete explanation on IRR calculations and assumptions. 

The investments within Pomona Investment Fund and the corresponding performance volatility thereof may differ significantly from the securities and or funds that comprise the Cambridge Index, which may contain strategies and asset types Pomona does not utilize. The Cambridge Index is not subject to any of the fees and expenses to which Pomona Investment Fund would be subject and no fund sponsored by Pomona Capital will attempt to replicate the performance of the Cambridge Index. Pomona does not pay any fees to Cambridge Associates to be ranked. 

S&P 500: The S&P 500 Index (the “S&P 500”) measures the value of stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. Standard & Poor’s intention is to have a price that provides a quick look at the stock market and economy. The composite performance of the S&P 500 is shown strictly for the purpose of comparison between the performance information contained herein and these popular public equity market indices. The S&P 500 is a widely recognized, unmanaged index of market activity based upon the aggregate performance of a selected portfolio of publicly traded common stocks. The performance of the S&P 500 shown in this document reflects the reinvestment of dividends and other distributions. In addition, the S&P 500 shown in this document is not subject to any of the fees and expenses to which any Pomona-sponsored fund would be subject. The S&P 500 has been selected as a general indicator of market health despite the lack of similarity of its underlying components to Pomona-sponsored funds. The S&P 500 index is not subject to any of the fees and expenses to which any Pomona fund would be subject to; Pomona-sponsored funds will invest in other market investment vehicles and will not attempt to replicate the performance of the S&P 500. http://us.spindices.com/indices/equity/sp-500. 

Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, pur¬chasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/ or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. For financial professional or qualified institutional investor use only. Not for inspection by, distribution to or quotation to the general public.

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