💸 #0021 - Secondaries

Sick of the market freaking out all the time? Try this trick pension funds use to get steady returns from the private equity market.

Author

Shrewd Investor
March 18, 2025 • Read in 9 minutes

Secondaries

Since I last wrote, the market has tanked, my hedges have been on, and now are half-off. Crypto dropped and a madman opened a $400M short position on Bitcoin (I would have shorted ETH instead) and the crypto bros are trying to wipe him out (or they would if they had any money left).

The famous Chinese curse: may you live in interesting times comes to mind this week.

This month we’re looking at a shelter from all this volatility using a trick from the private equity markets. If you’d like off the news-cycle rollercoaster, take a look at this week’s Deep Dive on private equity secondaries.

👇

Talk soon,

Josh

In today’s issue:

  • Weekly Wisdom - From P. T. Barnum…

  • Market Minute - Florida feeling the pain…

  • Deep Dive - The little trick to get the best private equity investments at a discount…

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WISDOM

❝

“Money is a terrible master but an excellent servant.”

— P. T. Barnum

SHREWD INSIGHTS

What the Wealthy Are Reading…

📈 MARKET INTEL

In Miami, downtown hotels saw a 3% demand increase over Miami Beach through May 2023, as travelers seek more affordable options. Overall, Florida hotel demand dropped 7%, while short-term rentals rose 5%, indicating a shift in accommodation preferences.

💰 SMART MONEY PLAYBOOK

Redeeming Series EE or I savings bonds within the first five years results in forfeiting the last three months of interest. After five years, no penalty applies. Bonds can be cashed after one year, but early redemption reduces earnings.

🪖 TAX WARFARE

The Financial Crimes Enforcement Network (FinCEN) has extended the beneficial ownership information (BOI) reporting deadline beyond March 21, 2025, and suspended enforcement actions, including fines and penalties, until new regulations are established to reduce the regulatory burden on businesses.

🤖 POWER TOOLS

Google's Gemini AI now enables robots to follow natural language commands, like "put the grapes in the clear glass bowl." This advancement allows robots to interpret and execute tasks based on verbal instructions, merging language understanding with physical actions.

 đŸ’Ž THE GOOD LIFE

Over 70% of luxury homebuilders' business comes from affluent move-up buyers and empty nesters who have benefited from years of home price appreciation. This trend highlights the strong demand for upscale properties among financially established demographics.

DEEP DIVE


The Backdoor to Private Equity’s Best Returns

How to Get PE-Level Gains Without the Lock-Ups, Blind Pools, or Uncertainty

Ever wonder if the best investment opportunities are behind doors you can’t open?

That was how I felt about private equity for years. Those wonderful, outsize returns people keep mentioning just weren’t on the table for you unless you were prepared to invest millions, tie up your capital for a decade or more and endure multiple years of negative returns before you could expect to see any payouts.

But what if I told you there’s a backdoor?

The Secret Road to Private Equity’s Strongest Returns

Picture this: you’re at a private auction. Everyone else is bidding on mystery boxes. They don’t know what’s inside, plus they’re unable to open their boxes for 10-12 years.

But you? You can bid on boxes that are half-opened already. You get to see what’s on the inside, purchase them at a discount, and fully unpack them in 3-5 years.

Private equity secondaries are an absolute way to do that.

What Are Secondaries in Private Equity (In Layman Terms)?

Private equity secondaries are simply interests in existing private equity funds that someone else wants to sell. Rather than committing new capital into a new fund (primary PE), you’re taking over an existing position in a fund that is already in the water.

It’s like purchasing a three-year-old car rather than a brand new one. You skip the steep depreciation hit, you know exactly what you’re getting and you pay less than the original sticker price.

Here’s How it Works

When private equity funds raise capital from their investors, they have a timeline to return that capital, usually around 10 years. Investors don’t want to leave their money with a single investment forever and so the vehicle has to liquidate its investments by the end of their Fund Lifetime.

But it’s not even 10 years because the fund usually takes some time, often 2-3 years, to source the investments, perform due diligence, and close the investments.

After that, they’re off to raise their next fund and have limited effort on the current fund. After all, they are monitoring the companies they acquired, not managing them.

Then at the end of the fund lifetime, some companies will be ready for an acquisition or IPO, but many will not.

But the fund still has to redeem its investors…

So, what do they do?

They sell their stake in the portfolio companies to another investor or a secondary fund that specializes in finding secondary investments.

Why Smart Money Is Sneaking into Secondaries

A record $162 billion entered PE secondaries in 2024. That's a 45% jump from 2023. But why?

You See What You're Buying

With traditional private equity funds, you are essentially giving your money to a person who says, “Trust me, I’m going to buy great companies with this.” That’s what’s called a “blind pool,” and it’s every bit as risky as it sounds.

With secondaries, you know exactly which companies you’re investing in — because the fund already owns them. No guessing games.

Your Money Works Immediately

Traditional PE begins when you pledge money, but unlike hedge funds where capital can be invested in securities, the capital with PE can be locked up in low-return investments for years on end, while the fund manager seeks out companies to acquire.

With secondaries, your capital goes directly to work in real businesses.

You Get Paid Faster

The PE that average folks get into regularly has your capital committed for 10-12 years with no cash for the first 3-5 in (that dreaded “J-curve” you may have heard about).

Secondaries also start sending you money much earlier — sometimes within months of your investment.

You Get More Than What You Pay For

Secondaries generally trade at a discount to what they’re worth (NAV = Net Asset Value) The average price in 2024 included 89% of NAV.

It’s like buying a dollar at 89 cents.

The Numbers Don't Lie

Let's talk returns:

Private equity secondaries have historically produced a 15.9% annualized return

That outperforms traditional PE funds (13.2%)

And it carries lower risk and more predictable results

The Downside

Nothing’s perfect, so here’s what to look out for:

  • Less upside potential (the businesses are already growing, not startups)

  • You still have a decent amount of cash to invest though (less than primary PE)

  • Owing to vested interests in trading, getting good opportunities is a challenging task; hence you need a manager or contacts

How to Get Started

So how do you actually invest in PE secondaries?

Get the right manager: Look for mid-sized secondary funds with direct access to deals and reasonable fees

Stay away from the behemoths: The mega-funds have multiple layers of fees and are having trouble finding enough good deals

Ask these questions:

  • What is their track record in secondaries specifically?

  • Where do they get their deals (the connections are important here too)?

  • How long should it take to get your money back?

The Bottom Line

Private equity secondaries provide what looks like an alchemy: higher returns for less risk and shorter lock-ups than traditional private equity.

It’s akin to being granted a fast pass at an amusement park. You get the same ride, but with much less line and a better seat.

Where everyone else is betting on mystery boxes, you can bet on known companies at bargain prices.

That’s the inside tip for reaping private equity returns without the traditional annoyances.

P.S. We've created a comprehensive "2024 Year-End Tax Playbook" that walks you through exactly what you could be doing right now to save on next year's taxes. Get it free at: https://newsletter.shrewdinvestor.com/p/2024-year-end-tax-playbook

If you’d like us to break down your portfolio or ask a question, submit yours here: https://shrewdinvestor.com/roastme

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The content provided in this newsletter is for informational purposes only and should not be considered as specific advice for any specific individual. The information is prepared by knowledgeable individuals and is not written by certified tax professionals or investment advisors. For personalized advice tailored to your unique financial situation, consult with a qualified tax professional, financial advisor, or attorney.

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