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).
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.
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.
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.
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