Introduction
Investors can access private funds in two ways, as an investor during the fund-raising period as a primary investor, or as the purchaser of an existing investor’s commitment through a secondary transaction. Secondary transactions are privately negotiated and can involve a single limited partnership (a single fund) or a portfolio of multiple funds.
With a secondary transaction the buyer purchases the seller’s interest in the fund(s) as of a reference date, typically as a discount to the net asset value. The buyer also assumes the seller’s liability to fund all uncalled committed capital calls.
History
Secondary public investments trade daily on various public market exchanges like the New York Stock Exchange. These markets have served investors dating back to the late 18th century. However, private equity investors have historically had little opportunity to sell their investments and were forced to hold until the fund manager sold the underlying portfolio companies and distributed the proceeds. Investors feared selling their positions would eliminate the opportunity to invest in future funds.
Many private investment allocators agree the private equity secondary market was created by Dayton Kerr, the founder at The Venture Capital Fund of America, later known as VCFA Group. Mr. Carr managed a venture capital investment partnership with the Chairman of IBM Thomas J. Watson, Jr. In 1979, Carr purchased Watson’s interest in the partnership, as President Jimmy Carter appointed Watson as the U.S. Ambassador to the Soviet Union. In 1982, Carr began a new partnership focused on investing in other secondary investments by raising the first private equity secondary fund with commitments of $6 million.
Other early secondary investors include Jeremy Coller, the founder of Coller Capital, and Stanley Alfeld, who founded Landmark Partners.
Over the past 35 plus years the secondary private market has moved from a cottage industry with very little liquidity and large discounts to a well-established, robust market.
