Dealing in Direct Secondaries

In 2008, the average 5-year-old private equity fund had distributed back 80 percent of LP contributions. Today, a similarly aged fund has distributed back only 25 percent, on average. This asset lock-up is leading to increased interest in direct secondary deals, according to David Wachter, Founding Partner of W Capital Partners.

Wachter explains what a direct secondary is, and how these transactions typically come about. He discusses the alignment-of-interest risks that need to be considered in these transactions, explains why he doesn’t like the term “zombie fund,” and tells why the GP decision to distribute private shares instead of cash back to LPs can be “disastrous.”