Alternative investments
Alternative investments
Podcast
23.12.2024
Primary funds (also known as primaries) and secondary funds (also known as secondaries) are forms of investment and belong to the private equity asset class in which investors invest in unlisted companies. In this article, we explain the key differences between primary and secondary funds, their advantages and how you can make the most of them.
The main difference between primary and secondary funds lies in the way in which investments are made. Primary funds invest in promising companies over several years and thus build up the portfolio step by step. In contrast, secondary funds buy mature fund units with existing portfolios consisting of several companies. The fund manager has precise knowledge of the portfolios and the target companies in which the fund invests from the outset.
Depending on the stage of financing or the reason for financing, primary funds invest in young companies as well as established, medium-sized and large companies. The fund manager specifically selects companies that have potential for further organic growth or that are to be further developed through targeted acquisitions (buy and build). The income from these funds is generated through company sales to strategic or financial investors and IPOs.
Secondary fund managers usually acquire existing portfolios of other investors at a discount to the net asset value (NAV). This spreads the risk across a large number of funds and portfolio companies. The discounts provide an immediate value contribution or an additional risk buffer. Fast payments and earlier returns make secondary funds a sensible addition to any private equity portfolio.
When investing in private equity, investors benefit from the expansion of their investment universe. The targeted selection of companies by professional managers creates a robust portfolio that offers a better risk/return profile.
Another key advantage of private equity is the opportunity to diversify the asset portfolio and thus become less dependent on stock market fluctuations. This leads to more stability and less volatility in the portfolio.
Primary funds offer investors the advantage of being able to invest in fast-growing companies with high return potential at an early stage. Investors invest in companies for various financing purposes, from venture capital to buyouts. They benefit from the active value enhancement of the company through targeted measures such as "buy and build" strategies or operational improvements that drive the growth and value of the companies.
Another advantage of primary funds is that the portfolio is built from scratch without having to take over existing investments or commitments. The fund manager can select companies that are a good fit for the fund and offer potential for further growth, further reducing the risk for investors . In order to spread the risk over time and benefit from different market cycles, it is also advisable for both primaries and secondaries to invest in funds that are launched in different years ("vintages"), as returns can fluctuate greatly depending on the year of launch.
The addition of secondary funds has particular advantages when building up a portfolio, as the fund manager already knows the majority of the portfolio, which leads to a more efficient and faster portfolio structure. Secondary funds also offer broad diversification, as they invest in several funds through various transactions. This leads to a spread across numerous managers, companies, sectors and regions. In addition, they offer diversification across different years of issue, which contributes to a significant reduction in risk for investors.
Note: Discounts in the secondary market have been particularly high in recent years. In 2022 and 2023, they were 16 % for buyout funds, 24 % for venture funds and 32 % for growth funds. These high discounts offer a strong risk buffer and are likely to remain attractive in the coming years.
Overall, primary and secondary funds complement each other ideally in a diversified private equity portfolio. Primary funds open up long-term growth opportunities and enable investors to benefit from the full value appreciation of a company. Secondary funds are characterized by rapid capital returns and broad diversification, which creates additional security.
If the portfolio is new and there is no existing portfolio, our recommended weighting is 80% primary funds and 20% secondary funds. This allocation reflects FINVIA's assessment of how the different strengths of both fund types can be optimally utilized.
We recommend secondary funds above all in the build-up phase of a portfolio, as they support liquidity through rapid capital drawdowns and earlier returns. However, the return potential of secondary funds is limited.
We recommend primary funds in order to achieve higher long-term returns, as they enable an increase in value over the entire life cycle of a company.
Experienced family offices such as FINVIA play a crucial role in investing in private equity, as their expertise and investment volumes give them access to the most interesting fund managers. Family offices not only offer support in the selection of funds, but also in the integration of this asset class into the overall portfolio strategy. It is important that the private equity strategy fits in with the strategic asset allocation (SAA). Another important feature of FINVIA is its powerful monitoring and continuous reporting, which provides a transparent overview of all investments.
If you would like to benefit from the current opportunities in the secondary market, you can access the Clipway Secondary Fund I via the FINVIA Investment Platform or your Family Officer. Clipway Secondary Fund I via the FINVIA Investment Platform or your family officer.
Investing in private equity via primary and secondary funds offers investors the opportunity to benefit from the potential of unlisted companies. While primary funds offer the opportunity to participate in the full performance of a company over its entire life cycle, secondary funds are characterized by faster capital returns and additional security. Both types of fund complement each other ideally in a well-structured private equity portfolio and enable investors to benefit from both long-term growth and stable returns.
Alternative investments
23.12.2024
Jan Hoffmann
Primary and secondary funds complement each other ideally in a well-structured private equity portfolio and enable investors to benefit from both long-term growth and stable returns. FINVIA explains the key differences between primary and secondary funds and what you need to look out for.
Primary funds (also known as primaries) and secondary funds (also known as secondaries) are forms of investment and belong to the private equity asset class in which investors invest in unlisted companies. In this article, we explain the key differences between primary and secondary funds, their advantages and how you can make the most of them.
The main difference between primary and secondary funds lies in the way in which investments are made. Primary funds invest in promising companies over several years and thus build up the portfolio step by step. In contrast, secondary funds buy mature fund units with existing portfolios consisting of several companies. The fund manager has precise knowledge of the portfolios and the target companies in which the fund invests from the outset.
Depending on the stage of financing or the reason for financing, primary funds invest in young companies as well as established, medium-sized and large companies. The fund manager specifically selects companies that have potential for further organic growth or that are to be further developed through targeted acquisitions (buy and build). The income from these funds is generated through company sales to strategic or financial investors and IPOs.
Secondary fund managers usually acquire existing portfolios of other investors at a discount to the net asset value (NAV). This spreads the risk across a large number of funds and portfolio companies. The discounts provide an immediate value contribution or an additional risk buffer. Fast payments and earlier returns make secondary funds a sensible addition to any private equity portfolio.
When investing in private equity, investors benefit from the expansion of their investment universe. The targeted selection of companies by professional managers creates a robust portfolio that offers a better risk/return profile.
Another key advantage of private equity is the opportunity to diversify the asset portfolio and thus become less dependent on stock market fluctuations. This leads to more stability and less volatility in the portfolio.
Primary funds offer investors the advantage of being able to invest in fast-growing companies with high return potential at an early stage. Investors invest in companies for various financing purposes, from venture capital to buyouts. They benefit from the active value enhancement of the company through targeted measures such as "buy and build" strategies or operational improvements that drive the growth and value of the companies.
Another advantage of primary funds is that the portfolio is built from scratch without having to take over existing investments or commitments. The fund manager can select companies that are a good fit for the fund and offer potential for further growth, further reducing the risk for investors . In order to spread the risk over time and benefit from different market cycles, it is also advisable for both primaries and secondaries to invest in funds that are launched in different years ("vintages"), as returns can fluctuate greatly depending on the year of launch.
The addition of secondary funds has particular advantages when building up a portfolio, as the fund manager already knows the majority of the portfolio, which leads to a more efficient and faster portfolio structure. Secondary funds also offer broad diversification, as they invest in several funds through various transactions. This leads to a spread across numerous managers, companies, sectors and regions. In addition, they offer diversification across different years of issue, which contributes to a significant reduction in risk for investors.
Note: Discounts in the secondary market have been particularly high in recent years. In 2022 and 2023, they were 16 % for buyout funds, 24 % for venture funds and 32 % for growth funds. These high discounts offer a strong risk buffer and are likely to remain attractive in the coming years.
Overall, primary and secondary funds complement each other ideally in a diversified private equity portfolio. Primary funds open up long-term growth opportunities and enable investors to benefit from the full value appreciation of a company. Secondary funds are characterized by rapid capital returns and broad diversification, which creates additional security.
If the portfolio is new and there is no existing portfolio, our recommended weighting is 80% primary funds and 20% secondary funds. This allocation reflects FINVIA's assessment of how the different strengths of both fund types can be optimally utilized.
We recommend secondary funds above all in the build-up phase of a portfolio, as they support liquidity through rapid capital drawdowns and earlier returns. However, the return potential of secondary funds is limited.
We recommend primary funds in order to achieve higher long-term returns, as they enable an increase in value over the entire life cycle of a company.
Experienced family offices such as FINVIA play a crucial role in investing in private equity, as their expertise and investment volumes give them access to the most interesting fund managers. Family offices not only offer support in the selection of funds, but also in the integration of this asset class into the overall portfolio strategy. It is important that the private equity strategy fits in with the strategic asset allocation (SAA). Another important feature of FINVIA is its powerful monitoring and continuous reporting, which provides a transparent overview of all investments.
If you would like to benefit from the current opportunities in the secondary market, you can access the Clipway Secondary Fund I via the FINVIA Investment Platform or your Family Officer. Clipway Secondary Fund I via the FINVIA Investment Platform or your family officer.
Investing in private equity via primary and secondary funds offers investors the opportunity to benefit from the potential of unlisted companies. While primary funds offer the opportunity to participate in the full performance of a company over its entire life cycle, secondary funds are characterized by faster capital returns and additional security. Both types of fund complement each other ideally in a well-structured private equity portfolio and enable investors to benefit from both long-term growth and stable returns.
About the author
Jan Hoffmann
