Episode summary
Why LPs Keep Selling Their Highest-Quality Funds
How I Invest With David Weisburd
· · 25 min · Hosts: David Weisburd · Guests: Ryan Levitt
Summary
Ryan Levitt argues that LP secondaries have historically outperformed traditional buyouts while carrying less downside risk because the worst secondary outcomes are still often positive. He says buyout return dispersion has widened, making it much harder to consistently rely on blind-pool primary funds for top-quartile outcomes, while average secondary funds can perform around second-quartile buyout levels with better liquidity and far stronger DPI.
The episode centers on why sellers are coming to the secondary market now. Levitt says institutions are under pressure from weak distributions, portfolio overweighting from the denominator effect, and rigid governance rules that force sales even when assets are doing well. He argues that sellers often part with their highest-quality holdings, not their worst ones, because they want to minimize the discount and avoid optics problems with boards and CIOs.
Levitt also explains why ICG focuses on buyout secondaries in the US and Western Europe, where it has relationship advantages, access to information, and approval from GPs. In his view, sourcing matters less than access, judgment, and the ability to buy from motivated sellers for reasons unrelated to asset quality. He closes with career advice: who you work for and with matters more than compensation alone, and culture should be diligenced like an investment.
Key takeaways
- Levitt says secondary funds have outperformed traditional buyouts over 5, 10, 15, 20 and 25-year horizons, especially on DPI.
- He argues buyout dispersion has widened so much that only first-quartile managers are consistently attractive versus an average secondary fund.
- Levitt says discounts today range from the mid-high 80s into the 90s, and better assets often sell first because boards dislike larger markdowns.
- He says access and information, not sourcing, are the key sources of alpha in secondaries.
- Levitt thinks the secondary market is still early, with dry powder enough to absorb only a little over one year of supply.
- His career advice is that who you work for and work with is more important than pay, especially early on.
Notable quotes
“your secondary performance has outperformed traditional buyouts. And the interesting thing is if you look at your worst performer, so what is your worst case outcome”
“You're far better off in an average secondary fund than you are in anything but first quartile buyouts”
“Distributions aren't coming back. So they go into the secondary market to go sell positions”
“the fallacy of the secondary market was investors will sell their lower quality assets. actually they're selling their higher quality assets”
How the episode opens
Ryan, you're co-head of LP secondaries at ICG, which has $127 billion in AUM. And last time we chatted, you said that secondaries in many cases are better than primary investments for LPS.
Yeah. If you look at the track record going back whether it's a 5year period or 20-year period, your secondary performance has outperformed traditional buyouts. And the interesting thing is if you look at your worst performer, so what is your worst case outcome?
Your worst case outcome in buyouts, you lose money. And that did wasn't the case 20 years ago. So buyout return dispersion has widened significantly.
And so your first quartile buyout returns are quite good. Your second cortile are good enough. Your third and fourth quartile are pretty disappointing.
If you look at secondaries, your fourth quartile secondary returns are making money and are massively outperforming buyout indices. So put it a different way. You're far better off in an average secondary fund than you are in anything but first quartile buyouts.
And we all know it's very very hard on a blind pool basis to pick first quartile buyouts consistently. So taking a step back, why would you not prefer to say I can pick an average secondary fund do almost as well as buyouts with far better liquidity and a far lower degree of risk from a return dispersion standpoint.
Professor Steve Kaplan, previous guest had this famous study on persistence. Persistence in venture capital is a tried and true thing over 40 50 years. 52% of funds persist in buyout. It's much more gray. It's not clear that there is persistence
For every great buyout manager. They have a bad fund or two. And it is hard to predict that in advance because it's not only the macro, it's also the micro.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- lp secondaries
- private equity liquidity
- dpi pressures
- return dispersion
- continuation vehicles
Companies and tickers mentioned
- ICG
- Pomona Capital
- GE Capital
- AlphaSense
Watch the episode
Watch “Why LPs Keep Selling Their Highest-Quality Funds” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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How I Invest With David Weisburd, this episode and its artwork belong to David Weisburd. Octagon is not affiliated with the show; this page is an independent summary.
