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Secondaries/PCA Technicals Prep Questions With Complete Answers!!
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Secondaries/PCA Technicals Prep Questions With Complete Answers!!
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Name: Score:33 Multiple choice questions
Definition 1 of 33
Buying out minority equity-holders in individual privately held companies. These investments are
similar to GP-Led, though direct provides liquidity to external investors in a company rather than
to LPs who invested through a fund.
Have the following key attributes:
- Almost always involves a single company or asset
- Intended to allow some investors to hold an asset longer, thus longer duration
What is a Secondary Mezz Deal?
What are Direct Secondaries?
What are GP-Led Secondaries?
What are Traditional LP Secondaries?
Term 2 of 33
What is an LP?
SimIlar to pref deals, but are structured in such a way to target a credit risk/return profile.
While underlying funds are generally taking equity positions, secondary mezz will take a
senior claim on cashflows up until a certain, relatively low, return hurdle. These strategies,
as a result, are often very resilient in market downturns but may not provide private equity-
like returns in robust economic environments.
Primary: investments into newly formed PE funds
Secondary: investors buys existing LP interests in PE funds
- Active Portfolio Management (overallocation into PE)
- Regulatory pressure
- Retracting from asset class
- Distressed/needs liquidity
Limited Partner - the investor into a fund.
Examples include endowments, pensions, family offices, sovereign wealth.
,Definition 3 of 33
*Opportunity to acquire assets at discounted valuations
- Purchase funds at assets below NAV and potentially at discount to intrinsic value
- Mitigate J-curve
- Creative structuring and fee structure produce differentiated source of alpha
*Buy Later and Shorter Duration
- Reduced fee burden from early stage of primary funds which helps drive n curve
- Preferable cash flow characteristics as fund strategy is now established
- Accelerated distributions can help meet liquidity needs and react to market conditions
*Diversification benefits
- Funds contain hundreds of thousand of underlying assets, expanding diversification along
vintages, geographies, and strategies
- Similar returns to primary funds but with more narrow band of outcomes comapritively
- Manager selection becomes extremely important since unsystematic risk is nullified
Why Invest in Secondaries?
Why are you interested in Secondaries?
What is a continuation fund?
What are GP-Led Secondaries?
, Term 4 of 33
What is the difference between LP and GP led secondaries?
Primary: investments into newly formed PE funds
Secondary: investors buys existing LP interests in PE funds
These transactions involve buying an individual LP stake or portfolio of later-in-life funds
from an LP seller. These occur typically 6-8 years into fund life, perhaps 70% funded, and
generally at a discount to NAV and potentially intrinsic value. Have the following
characteristics:
- Significant Diversification
- Financial Engineering (strategic use of leverage, contribution deferalls etc.,)
- Less Ability to Select Top Managers
LPs: These transactions involve buying an individual LP stake or portfolio of later-in-life
funds from an LP seller. These occur typically 6-8 years into fund life, perhaps 70% funded,
and generally at a discount to NAV and potentially intrinsic value. Have the following
characteristics:
- Significant Diversification
- Financial Engineering (strategic use of leverage, contribution deferalls etc.,)
- Less Ability to Select Top Managers
GP: Involves a private market primary fund manager (GP) leading a process to provide
liquidity to investors in one of their funds while retaining ownership of an asset or group of
assets. All existing LPs are given the option to sell to a secondary buyer at a negotiated
price or roll their interest into a new investment vehicle (continuation fund). Characteristics:
- Greater Control for secondaries manager on asset selection than Traditional LP stakes
- Access to high quality primary managers
- Can choose both primary manager and specific industries and investment types
- Less diversifications than traditional secondaries
LP:
- Active portfolio management (minimize number of managers in portfolio, consolidate)
- Regulatory pressure (Volcker Rule)
- Retracting from asset class (i.e. overallocation to PE)
- Distressed/LIquidity driven
- Fund of fund wind downs
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