Adam Le’s Post

Research suggests semi-liquid funds pay more for secondaries than closed-end funds – but why? According to Tangible’s Nathan Sutton, pricing ultimately boils down to the internal rate of return (IRR) a fund is targeting — and the IRR for an evergreen fund is typically 5-10 percentage points lower than a closed-end fund, leading evergreen managers to bid as much as 5% higher. “They’re not overbidding, they’re bidding in line with their investment target return,” he told Secondaries Investor. “The only thing they are overbidding against is closed-end funds.” Read more: https://lnkd.in/gcntvVdh #secondaries 

”But secondaries have another, little discussed, advantage for buyers since the market began to take off in 2015. That year, the Financial Accounting Standards Board decided in a new rule that after purchasing LP interests at a discount, investors can mark them up to the NAV of the private equity fund. Those markups 'can act as an enhancement to overall return,' Kunal Shah, the head of private asset research and model portfolios at iCapital, and Florence Leung, senior vice president on the research and education team at iCapital, wrote in a recent report." Did it take off and FASB decide a new rule or did the FASB rule propelled the take off? "Take Hamilton Lane Private Assets Fund, a $2 billion fund launched in 2021 that has almost half of its assets in secondaries. That fund has a 17 percent IRR, according to Preqin. Such a sizeable gain was accomplished, in part, by writing up the LP interests it purchased at a hefty discount." Via Financial Times Alphaville (https://lnkd.in/gS8h-bXh) https://lnkd.in/gUgRjugv

For investors that may be contemplating the liquidation of a rental property, reinvestment risk is a real thing. Money market yields are waning and few portfolio set ups of high yield BDCs in CEF format make sense. Here are some ideas of monthly paying funds by that are diversified across low cost index funds, actively managed hybrid equity/call option funds and high yield corporates, all with near low expense ratios for their given asset class.

💡 Insight Time 💡 Our founder, James Baxter, shares below his insights on the recent announcements from private equity executives about the lower returns forecast for their industry following the investment surge during the pandemic. Read more ⬇

Interesting to read from several sources (in addition to the one quoted here in PEI's Side Letter) that between 10+ to 20% (only) of NAV transaction volume (at the fund level) in the recent past years would be used for money-out (dividend recap at the fund level to boost DPI and to distribute money to LPs,). The rest is money-in used for a variety of reasons (to finance new add-ons, new platform investments, or to refinance asset-level debt, among many others). It remains to be seen whether this share will increase in the future (which would be surprising, given the lack of popularity of this option among LPs and the abundance of negative press on the subject recently). 

We delved into Jefferies' findings on what's buoying LP-led activity in the secondaries market in the first half found within its latest Global Secondary Market Review, including the fact that estimates over $5 billion of secondaries capital has been raised by ’40 Act funds over the past year, with that trend set to continue. “The entry of ’40 Act funds [has] become a huge new source of capital and made the LP side of the market even more competitive than it has been,” Matthew Wesley, global head of Jefferies' private capital group, told Secondaries Investor. “[The strong pricing] is just a reflection of how strong the market is today, which is… driven not just by successful fundraising of flagship funds, but also the advent of ’40 Act funds.” Catch the full story with Hannah Zhang below: https://lnkd.in/gesjyXux

📘 #BookRecommendation “King of Capital by David Carey and John E. Morris.” Mixing both technical and narrative tones, this book provides an in-depth analysis of the financial innovations that have shaped private equity, focusing on the development of key financial instruments by Blackstone’s influential figures. The book offers a detailed examination of the mechanisms behind Blackstone's ascent, with insights from its co-founder and CEO, Stephen A. Schwarzman The book delves into the strategic contributions of Chinh Chu, Jonathan D. Gray, Chad Pike, and James Lee, amongst others. • Chinh Chu’s strategy to list companies on German markets, rather than American ones, to achieve a higher industry multiple highlights an advanced approach to market valuation. He later came to masterize SPACs at CC Capital. • Jon Gray and Chad Pike’s approach to acquiring and subsequently dissolving Real Estate Investment Trusts (REITs) to sell assets individually underscores a method for extracting higher value by leveraging the principle that the sum of the parts can exceed the whole. • James Lee’s role in establishing bank syndicates in the 1980s is also highlighted, showcasing the evolution of financing structures critical for large-scale private equity transactions. Schwarzman’s leadership through these developments has been instrumental in shaping Blackstone's strategy and influence in the global financial landscape. Additionally, King of Capital explores significant financial techniques such as securitization and dividend recapitalizations. Securitization involves pooling financial assets and repackaging them into securities, a strategy for risk management and liquidity. Dividend recapitalizations, where additional debt is used to fund dividend payments to shareholders, illustrate the method of extracting value from investments while managing financial leverage. "King of Capital" provides a comprehensive examination of the financial strategies and innovations driving private equity. It is a valuable resource for understanding the complexities of the industry and the strategic decisions that have defined its growth.

The Little-Known Secret to the Success of Secondaries (via Institutional Investor): https://ow.ly/9oJX50Skn7H #privateequity #privateinvestments #secondaries #funds #institutionalinvestor

"Return of capital" distributions from ETFs, mutual funds, and closed-end funds are not taxable. Sounds great, right? There's more to it. 40 Act funds must distribute 90% of their taxable income each year. Anything beyond 90% is a "return of capital" distribution. Suppose a fund harvests losses that net with realized gains, then it has no taxable income. So, all distributions are "return of capital," which are not taxed this year. [This is called a nondividend distribution and appears on a 1099-DIV] But the shareholder's basis declines by the capital returned. When the shareholder disposes of their shares, they'll pay more capital gains. [This capital gain eventually appears on a 1099-B] Return of capital is effectively tax deferral... but it's not all good news. The attached explainer tells us how to assess the quality of a return of capital. We need to know if the distribution is funded by total return or just eroding principal. Is NAV growing following distribution or sinking? Should we bother with funds that erode principal? A Fidelity report sums it up nicely: "...consistent use of destructive return of capital to artificially pump a distribution rate should preclude it from further investment consideration; do not put your money into such a fund" That's unusually clear. I'm grateful. Read more here: https://lnkd.in/gPTgvPMv See the examples in the attached two-pager to make the concepts stick. --- blog.taxalphainsider.com for all things taxable portfolio management

The Little-Known Secret to the Success of Secondaries (via Institutional Investor): https://ow.ly/smEu50Sm31Y #privateequity #privateinvestments #secondaries #funds #institutionalinvestor