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8th June 2015

Research: 17Capital co-authors study on risk

Drivers of risk for investors in secondary funds


New academic research by PERACS and 17Capital finds secondary funds targeting tail-end funds have higher risk than those targeting younger funds.

In a maturing secondary market, Professor Oliver Gottschalg of HEC Business School and Augustin Duhamel of 17Capital have produced a study on the drivers of risk for investors in secondary funds.

Professor Gottschalg analysed the risk of secondary acquisitions in 718 global buyout funds with 1980 to 2013 vintages, using Preqin’s performance data. The research uses the PERACS Risk Coefficient to determine the level of risk in a portfolio, where ‘0’ = perfectly distributed profit (lowest risk) and ‘1’ = perfectly concentrated profit (highest risk). The profit contribution of each investment in a portfolio is measured by the PERACS Risk Curve.

Professor Oliver Gottschalg, HEC Business School said: “Our research enables secondary fund investors to better understand and assess risk in their private equity portfolios, and more specifically across secondary strategies. The research reveals a higher risk for secondary funds targeting tail-end funds.”

Another finding from the study shows that investors acquiring a preferred equity position in funds with a structured investment approach decrease risk versus investors in traditional secondary funds. Their senior position, resulting in priority on portfolio distributions, and contractual return, reduces the risk taken on each transaction.

Augustin Duhamel, Managing Partner of 17Capital said: “A key finding from the study demonstrates the lower risk of preferred equity funds. This is typically combined with lower participation in the portfolio upside. Hence, investors selling to preferred equity buyers keep a greater share of their portfolio’s upside potential.”

In addition to the findings above, the performance quartile of the General Partner and the stage of the economic cycle are also found to impact secondary fund risk.

Drivers of risk for investors in secondary funds