What I’ve found is that an LP can’t price the asset. We’ve seen these guys price. We understand that in two weeks they’re not getting information on 18 portfolio companies – and they’re still setting a price. We call that a best guess. “It worked really well when the market was going up. But today it is really volatile and a lot more work needs to be done.” However, such uncertainty about pricing is less of a problem for direct secondaries investors, Penn says. Direct secondaries deals can manifest in a number of forms, such as spinning a management team out of a GP or acquiring particular assets within LP interests. “We don’t feel LP interests are really the assets,” Penn says. “It is a means of owning the asset, which is the underlying portfolio company.” In its secondary co-investments, IOOF has dealt with considerable information asymmetry, says Hugo Agudo, portfolio manager of alternative investments at IOOF. “As a buyer, the amount of information you’re given is atrocious,” Agudo says. To glean some insights about the co-investments, IOOF spoke with market sources in the fortnight before the deadline for the deal. It relied on its asset consultant and contacts in the unlisted assets space for information.

John Eliopoulos, who oversees Telstra Super’s Australian equities investments but also provides input into its private equity program, says it would take a “quantum leap” for the fund to engage directly with GPs and perform due diligence on assets they are offering on the secondary market. “It would be a quantum leap for a garden-variety super fund like Telstra Super to resource up to do the heavy due diligence that is involved in direct secondaries,” he says. But Hill, at Frontier, says this extra work – if executed well – can be worthwhile. “The more structuring that is required, and the more complicated it becomes, creates opportunities regarding who can supply the liquidity and who has the ability to price those assets,” she says. Some secondaries managers allocate a small portion of their portfolios to direct transactions. But the intensity of the due diligence required means these investments can, in some cases, comprise half of their workloads, says Snyman, at Cambridge Associates.

“You may be presented with a portfolio with about 100 company names in it. How do you get your head around that?” he asks. “So the skill is in identifying the vendor that wants to do it quietly and then working with a management team that is able to disclose exactly where the jewels are in the portfolio. The rest are pretty much valued at zero.” Penn says the best approach is to “cherry-pick” assets from a range of vendors. This gives investors a pricing advantage. “They are looking at a small number of portfolio companies where they can get the information, spend time with management – the CEO, CFO, COO – because they are more likely to buy than an investor looking at a big group of assets,” he says. Networks are important. But not all of the great secondary deals come out of New York or Sand Hill Road, the renowned venture capital ecosystem in California. “The question is: Once you identify the opportunity, do you have access to the information to do due diligence and make a good pricing decision. That deal can be anywhere. It’s a truly global business,” Penn says. Managers should not take on more businesses than they can successfully steer towards an exit, warns Suters, at Quentin Ayers.