Closed-end funds, record secondary market transactions at 102 billion in six months

"Quite different is the context for venture capital funds, where uncertainties related to exit timing and asset valuation have kept downward pressure high: transactions often take place between 60 and 70 cents per dollar, reflecting marked discounts," PitchBook analysts note.

The age variable, then, further affects pricing: SecondaryLink data indicate that discounts tend to widen as the fund ages, particularly beyond 10 years, when the residual value is concentrated in tail-end assets whose realisation is uncertain or remote. This phenomenon is even more pronounced in cases where the most attractive holdings have already been sold and the residual portfolio is composed of hard-to-liquidate assets.

"For investors, this dynamic raises the classic trade-off: either accept an immediate discount to obtain liquidity, or hold on to the investment trusting in a future upside that may not materialise. On the buyers' side, NAV discounts may offer a form of protection from downside, but for more problematic funds there may also be no interest in the market, the report says.

While market prices provide a snapshot of the present, according to analysts, historical cash flow data allow contextualisation and assessment of whether such discounts are justified. Using PitchBook's time series, it is possible to assume entries into the secondary at different fund ages and measure cumulative distributions over the next five years. The break-even analysis looks at inflows and outflows relative to NAV at the time of the hypothetical purchase, zeroing in on the fund's previous performance. In this way, each vehicle can be compared on a consistent basis from the perspective of the secondary investor.

The NAV used in these simulated entries is referred to as the 'entry NAV', i.e. the reference value for the secondary investor at the time of the share purchase. The time horizon considered is five years, although many of the funds under investigation do not reach liquidation within this period.

But even with discount buying, will secondary fund investing be able to deliver the expected returns? To give an answer, PitchBook analysts analysed historical data and made projections five years from now.

"Let us take the example of buyout funds in their eighth year. Assuming a stake is purchased at this time and held for the next five years, the results in terms of distributions turn out to be extremely mixed. Almost half of the more than 800 buyout funds analysed failed to return, in the form of cash flows, an amount equal to the NAV carried forward to the eighth year. This implies that a hypothetical buyer who had paid 'at par' would not have recouped the entire investment through realisations alone,' they explain in the report.

At the other extreme, funds belonging to the top quartile, those performing better than average, distributed on average more than twice the initial NAV, highlighting the high unevenness of results even in the late stages of a fund's life cycle.

In the case of venture capital funds, the probability of recovering the entry NAV in the five years following a transaction on the secondary market is very low: only funds in the top quartile manage on average to repay the entire entry NAV. Growth funds, on the other hand, lie somewhere between buyout and venture capital in terms of both pricing and actual performance.

"It is important to emphasise," the analysts warn, "that distributions made in the five years following entry into the secondary market offer a clear measure of actual returns, but do not tell the whole story. In fact, many funds retain residual value beyond our hypothetical time horizon. Thus, failure to return NAV within five years does not necessarily imply a definitive loss, but it does highlight the real risk of illiquidity and delayed realisation for buyers or investors who choose to remain invested. And there is no guarantee that the residual NAV will actually be monetised in the future'.