Secondary valuations remain attractive despite smaller discounts

Investing.com — According to Wells Fargo analysts in a note Wednesday, secondary valuations in the private equity market have shown resilience, even as discounts have become smaller. 

The bank said in its investment strategy note that secondary valuations reached their lowest point during the market drawdown in 2022 but have experienced a modest increase through the first half of 2024.

Wells Fargo explains that as the likelihood of an economic soft landing increases, the secondary private equity market continues to present attractive opportunities for investors. 

“The secondary market is typically only available for larger fund stakes and is a common solution for institutional investors looking to rebalance their portfolios,” wrote Wells Fargo.

They add that typically, secondary transactions occur for larger fund stakes, providing liquidity options for investors who have committed their capital for the long term, often spanning 6 to 12 years.

Wells Fargo highlights that investors in the secondary market can acquire interests at a discount to the fund’s current net asset value (NAV). 

The purchasing strategy is said to offer several advantages, including improved visibility into the underlying portfolio holdings and a shortened path to positive returns. 

Furthermore, the bank states that as secondary investors often buy these interests after the fund’s investment period, they typically find portfolios that are fully invested and starting to distribute capital as investments are exited.

Despite the observed decrease in discounts, the Wells Fargo note indicates that expectations for interest-rate cuts could foster sustained economic expansion. This environment may lead to rising valuations for private equity investments, thereby increasing fund NAVs, according to the firm.

Wells Fargo concludes that the current climate remains favorable for secondary investors, combining attractive discounts with an increasing likelihood of a soft landing, which could enhance private equity strategies in the near term