Invico’s head of secondaries explains how the space has evolved and what advisors need to know as the rush to private markets intensifies
Private companies don’t want to IPO the way the did pre-pandemic. That decline in public offerings can come down to a host of reasons. Public markets are volatile and investors have shown a preference for large-cap stocks. There is also a greater availability of private capital to drive value appreciation before a public offering. Interest rate cycles and macro uncertainties around tariffs also weigh on business decisions to go public. This has led many general and limited partners in businesses to seek the secondaries market for liquidity, selling secondaries and opening up an opportunity for new private market access.
AJ Jain, head of secondaries at Invico Capital explained why this market has become a more popular place for institutional and retail investors in recent years. He outlined some of the key distinctions that investors need to be aware of and outlined how his firm approaches the secondaries market, with more of a view to accretive double-digit gains than some of the moonshots that certain venture secondaries investors seek.
“We're not looking for investments where we put $1 today and it'll become $2 tomorrow. We're looking for investments where if something is held at $1 today we put in 50 cents, and we hope they just achieve the dollar. That's it. So if they can achieve that, we're happy,” Jain says. “When we started doing this, it was all institutional, and in the last three to four years, we've seen a large amount of inbound coming from the retail side.”
Jain explains that there has been a great deal more education about secondaries among advisors and investors. Rather than inbound questions asking what this market is like he would receive a decade ago, he now gets questions about whether the firm trades more in GP and LP secondaries or in venture secondaries. He believes that more investors have come to view this market as a space in between their public equity and fixed income allocations. Like other private assets, he believes secondaries can serve as a volatility offset and a returns driver.
Because Jain and his team tend to purchase secondaries at a discount, he notes that investors tend to get an immediate NAV pop. That discount also creates a comfortable margin of safety for the investment. Because these strategies are priced on a quarterly basis, too, they offer ballast and stability in the portfolio which can help with behavioural management.
Invico’s strategy, Jain explains, is to seek smaller companies with GPs and LPs seeking to sell secondaries. Going after bigger names, he notes, puts retail money up against institutional and in massive deals valued around the hundreds of millions of dollars. Seeking alpha, he and his team try to find deals with features that might put off some bigger buyers. Deals, for example, that include a real estate component, or a hedge fund portfolio. Those sort of features would put off more pure-play secondaries investors, but Invico’s relative agility allows them to capture opportunity in that space, often at discounts between 35 and 45 per cent.
“We take a pretty conservative approach, where if the GP is marking an asset at 1x we're assuming that we're going to get a 0.7x or 0.5x on there,” Jain says. “And if after that, we can get a double digit return, we don't see a whole lot that can go wrong on that side.”
For advisors looking to enter the secondaries space, Jain recommends a relatively straightforward approach that begins by determining what an advisor seeks to gain from their secondaries allocation. That, in his view, is high-quality, risk-adjusted, and diversified private market exposure. He compares secondaries to the other options for a private asset allocation: private equity funds and private credit funds. He argues that secondaries trade at a discount to those other funds and come with a shorter duration. Invico’s funds, he explains, are three plus one years, as opposed to the 10-year lock that comes with many private equity funds.
There can be drawbacks in secondaries, he notes, which include the specific GPs running the strategy in certain secondaries. There is a relatively difficult balance to strike in the secondaries market between origination, diligence, and execution as the market is driven by supply. He argues that execution can often be where GPs fall flat, resulting in missed returns.
For advisors who want to discuss secondaries with their clients, Jain notes that despite the inherent sophistication and technical detail of these products, client interest still largely rests on the same basic principles of investment advice.
“We did a 20-minute call for some advisors’ clients… and the only question they had for me was ‘am I going to lose money,’” Jain says. “The first question clients have is preservation of capital, the second question is how realistic are the returns. From an advisor’s perspective, the view is that there needs to be a private market allocation in some form…and secondaries might be the better way because you’re buying at a discount with a shorter duration.”
