Alternatives Update – Private market secondaries: "Perfect time for lucrative investments

The rapid and steep rise in interest rates over the past two years has subjected traditional portfolios to a tough stress test and shown how important alternative investments are for performance-oriented asset allocation. "Asset protection can no longer be achieved with equities and bonds alone. The return of attractive bond yields does nothing to change this," says Dr. Marcel Lähn, Member of the Management Board and Chief Investment Officer at FERI. Especially in times of higher base yields, volatility strategies are particularly attractive for additional premium income. Hedge funds also proved their worth once again in 2023. "In times of high volatility, market-independent hedge funds make an indispensable contribution to diversification and risk adjustment," adds Lähn and continues: "In addition, private market investments offer a significant increase in the expected return of a portfolio."

Investors must take countermeasures

The recent market corrections have shifted the weighting between alternative investments and traditional investments. The relative value of alternatives in many investors' portfolios has risen sharply due to the price losses in equities and bonds in 2022. In many cases, the legally prescribed quotas for alternative investments were exceeded as a result. In order to comply with the regulatory requirements, many investors are now forced to reduce parts of their private market allocations. "The secondary market is currently being increasingly used by private equity funds for portfolio reallocation and to procure liquidity," says Marcus Storr, Head of Alternative Investments at FERI AG. The associated price discounts are creating very attractive investment opportunities. "Fund shares or direct company investments are sometimes available at a discount of up to 30%. And this applies to funds that operate with low leverage and have profitable companies in their portfolios. The window of opportunity for such lucrative offers is still open until the beginning of 2025," Storr is convinced.

Private debt secondaries as a portfolio addition

As private loan agreements have come under pressure due to the sharp rise in market interest rates, the private debt segment is currently also offering opportunities. Investors are increasingly disposing of fund units and selling them on the secondary market at favorable conditions. In the still relatively young secondary market for private debt, however, expertise and a good network are
network are particularly important in order to invest successfully. From a diversification perspective, it definitely makes sense to invest not only in private equity secondaries, but also on the credit side.

In the current environment, a secondary market investment also offers the advantage over subscribing to a newly launched fund that the J-curve effect, which describes the initial loss phase of a private equity investment, can be greatly shortened or even completely eliminated. "Due to the price discounts, the investor does not have to wait several years before reaching the profit zone with a secondary market investment. The investment pays off from day one. There are also no administrative capital calls in this case, as there is often an initial full payment," adds Storr.