Private equity secondaries: A primary allocation in an evergreen private equity portfolio

CONTRIBUTORS

Jake Williams

Global Co-Head of Alternatives
Wealth Management Product

Arthur Thomson

Global Alternatives Product Strategy Specialist

Tony Davidow, CIMA®

Senior Alternatives Investment Strategist
Franklin Templeton Institute

At Franklin Templeton, we are committed to providing investors with timely insights and industry perspectives on private markets. As the industry evolves rapidly, this series brings clarity to the key trends shaping its future”

George Stephan

COO - Global Wealth Management Alternatives

Introduction

Private equity is at a turning point in the wealth market, with investors and advisors navigating how best to allocate across its sub-strategies. The growing availability of funds—both evergreen and closed-ended/drawdown—has expanded the investment landscape and offers several advantages for portfolio construction.

Diversification is the only free lunch in finance.”
Harry Markowitz, Nobel Prize-winning economist.

In this paper, we outline an approach that positions private equity secondaries as the cornerstone of a core/satellite allocation model, focusing on two key aspects:

Investment merits: Why secondaries may provide attractive risk-adjusted returns.
Ease of implementation: How they simplify portfolio construction.

Conclusion: Building a resilient private equity allocation

Allocating to a single evergreen vehicle can reduce operational complexity when constructing a private equity portfolio, as we outlined in our previous paper. However, relying on a single private equity manager may not be optimal for investors seeking a best-in-class evergreen allocation. This approach concentrates risk with one manager and potentially limits exposure to a narrower subset of private equity strategies. While investing across multiple primary strategies can enhance diversification, it also increases operational burden and may still leave gaps in portfolio construction.

Most evergreen private equity funds aim to provide broad exposure across a manager’s platform, spanning multiple geographies and sectors. However, as outlined earlier, private equity managers exhibit inconsistent performance across different periods and segments of the market. Diversified secondaries managers, in contrast, construct portfolios across sectors, geographies and industries, offering exposure to a wide range of private equity managers. This approach can provide greater diversification, making secondaries a strong foundation for an evergreen private equity allocation. Selecting a secondaries manager with broad coverage is key to ensuring a well-diversified portfolio.

While primary private equity strategies can deliver outperformance, their variability in returns suggests they should only be pursued when advisors have high conviction in a manager’s expertise within a specific market segment. In such cases, closed-ended/drawdown funds with targeted investment strategies may be a more suitable access point than evergreen structures, which can include legacy assets and potentially a broader investment remit beyond a manager’s core specialties.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal.

Alternative strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. Active management does not ensure gains or protect against market declines.

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