Can you explain why/how the underlying fund bought are "purchased and immediately marked up" in evergreen structure ? Ain't they entered into the fund at a discount then marked up only afterwards ? In that sense doesnt the LP also get exposure to some of the value/mark up return ?
I am offered Carlyle Secondary Fund recently..perhaps good to give it a miss.
Pardon my technical musing...but can you explain in more detail ?
Does the assets which were bought at discount by the sponsor shop get marked up before or after being put into the evergreen secondaries fund ?
If it is before, then there shouldn't be any +ve in NAV for the LPs of the evergreen secondary fund right ? But that's isnt the case, since i notice most of them showing something like 2 years of 12-16% return.
If it is after, then the LP should should some +ve return in NAV since they are already holding the fund, at least so long there is consistent inflow into the fund.
I cannot speak for every single fund, but every 40 Act fund prospectus I have read relies on the values ascribed by GPs. In fact this would mean that the first "mark" is at NAV. For performance purposes, this is 'after' purchase, I guess, but as a technical matter it could be seen as immediate.
I have since learned more about how these transactions work. The GP gets to approve secondary market buyers, and marking at NAV is a condition (at least often) of approval. There would, i think, be times when this would not apply (for example, if an LP knew that a sale of a fund stake was pending) but it would generally apply.
If you are an original investor in an evergreen fund, you get the benefit of all the NAV markups.
If you invest later, you get the benefit of NAV markups that happen after your investment, but you are buying in at NAV for the funds already owned prior to your investment. For later investors, this is a distinct disadvantage, and this dynamic does not apply to traditional secondary funds whose investors commit capital at fund inception.
Funds that have a policy of marking to NAV (those that I've seen all do this) that don't buy stakes at discounts cannot get any benefit from markups to NAV. To mark stuff up, you have to buy it first. Where is the money to buy stuff coming from? Lately, inflows. Without them, performance suffers.
Appreciate it Nathan. I agree; particularly as the number of funds grows, it become more and more likely that gates get up up for at least some. Whether there is a widespread "run on the bank" vibe that affects all funds is an open question.
Another thing worth considering is how dicier markets affect manager behaviour even in the absence of gating. My view: it definitely doesn't help investors when a fund manager fears that he/she might have to gate. Periodic liquidity, sold as a feature, is actually a product bug. Drawdown funds don't face this problem.
Can you explain why/how the underlying fund bought are "purchased and immediately marked up" in evergreen structure ? Ain't they entered into the fund at a discount then marked up only afterwards ? In that sense doesnt the LP also get exposure to some of the value/mark up return ?
I am offered Carlyle Secondary Fund recently..perhaps good to give it a miss.
Pardon my technical musing...but can you explain in more detail ?
Does the assets which were bought at discount by the sponsor shop get marked up before or after being put into the evergreen secondaries fund ?
If it is before, then there shouldn't be any +ve in NAV for the LPs of the evergreen secondary fund right ? But that's isnt the case, since i notice most of them showing something like 2 years of 12-16% return.
If it is after, then the LP should should some +ve return in NAV since they are already holding the fund, at least so long there is consistent inflow into the fund.
I cannot speak for every single fund, but every 40 Act fund prospectus I have read relies on the values ascribed by GPs. In fact this would mean that the first "mark" is at NAV. For performance purposes, this is 'after' purchase, I guess, but as a technical matter it could be seen as immediate.
I have since learned more about how these transactions work. The GP gets to approve secondary market buyers, and marking at NAV is a condition (at least often) of approval. There would, i think, be times when this would not apply (for example, if an LP knew that a sale of a fund stake was pending) but it would generally apply.
If you are an original investor in an evergreen fund, you get the benefit of all the NAV markups.
If you invest later, you get the benefit of NAV markups that happen after your investment, but you are buying in at NAV for the funds already owned prior to your investment. For later investors, this is a distinct disadvantage, and this dynamic does not apply to traditional secondary funds whose investors commit capital at fund inception.
Funds that have a policy of marking to NAV (those that I've seen all do this) that don't buy stakes at discounts cannot get any benefit from markups to NAV. To mark stuff up, you have to buy it first. Where is the money to buy stuff coming from? Lately, inflows. Without them, performance suffers.
Well written, whether investors can exit before a fire sale rush on liquidity causes discounts will be key. Gating may be likely for some funds.
Appreciate it Nathan. I agree; particularly as the number of funds grows, it become more and more likely that gates get up up for at least some. Whether there is a widespread "run on the bank" vibe that affects all funds is an open question.
Another thing worth considering is how dicier markets affect manager behaviour even in the absence of gating. My view: it definitely doesn't help investors when a fund manager fears that he/she might have to gate. Periodic liquidity, sold as a feature, is actually a product bug. Drawdown funds don't face this problem.