Since inception, PCM has had a secondary component in all of its funds and began offering dedicated secondary funds in 2002. PCM prides itself on leveraging its broad network to find smaller less competitive transactions, responding quickly to sellers, and seeking creative solutions where appropriate.

Investment characteristics

Secondary funds enjoy several attractive investment characteristics, including a generally shorter holding period, (since purchased interests are more mature,) the potential for purchase price discounts to intrinsic value, and the potential for lower risk since portfolio assets already exist and can be evaluated.

Secondary Investment Characteristics

• Generally shorter holding period
• Potential for quicker return of capital
• Potential for discounts to intrinsic value
• Less blind pool risk
• Vintage year diversification
• Attractive risk/reward profile

With over 15 years of experience in the secondary market, PCM has a history of deals ranging across the full spectrum of transaction types, including:

Traditional secondary

Historically, the most common secondary transaction is the sale by an investor of a limited partnership interest in an existing private equity partnership. In such a transaction, the seller has typically already funded more than 50% of its capital commitment to the underlying partnership. In these cases, PCM will carefully value the current portfolio and make a bid that can range from a significant discount to a premium relative to the fund’s Net Asset Value, depending on the valuation policies of the underlying manager, the market conditions at the time of sale, and the status of the underlying portfolio. PCM will then purchase the position at the agreed upon price and assume all continuing funding obligations relating to that position.

Young or lightly funded secondary

PCM will also consider lightly funded secondaries, generally those positions that are less than 40% funded at the time of purchase. Such positions generally have more in common with primary investments since they are by definition relatively early in the life of the underlying fund. The transaction process and dynamics are similar to traditional secondaries, though the pricing dynamics may differ somewhat because of the funds young age.

Portfolio transactions

PCM will consider purchasing multiple funds comprising a portfolio of interests in a single transaction. PCM will value each position separately, in the same approach as for a single interest transaction and then pool them together to create a single portfolio bid for the seller.

Secondary directs

In some cases, investors may own direct investments in private companies, either on a standalone basis or together with partnership interests. PCM will consider purchasing such interests and will evaluate each as a standalone investment according to its process for direct investments.

Synthetic secondaries

Where a seller owns a portfolio of direct investments, PCM will consider purchasing the entire portfolio and retaining a separate manager or management team to manage the portfolio, thereby creating in effect a new private equity partnership and firm. In some cases, the management team may already be involved with the portfolio. In other cases, PCM may recruit a team for the purpose.

Structured transactions

In some cases, a seller may seek relief from some or all of the remaining capital call obligations of a portfolio of private equity interests, but for various reasons does not desire to sell the positions, either because the seller seeks to retain relationships with the General Partners in question or because the portfolio may be difficult to sell in a traditional secondary or for some other reason. In such cases, PCM can create a structured transaction where PCM and the seller agree to prescribed capital call and distribution sharing mechanisms that can meet each party’s needs.

PCM has worked with General Partners who have various needs that can be met via a secondary transaction, including adding capacity to a fund, changing certain partnership terms, providing a level of liquidity to some or all investors, purchasing some or some part of various positions. In such cases, creativity is an important attribute and PCM has demonstrated an ability to be responsive to General Partner and Limited Partner needs in coming up with workable solutions.

Stapled transactions

In rare cases, and in particular when a General Partner has been instrumental in creating a transaction, PCM will consider providing additional primary capital to a General Partner in conjunction with a secondary transaction. In such cases, PCM considers the entire transaction a secondary, and its return characteristics and cash flow dynamics must meet PCM’s requirements for a secondary transaction.