Eric Klen @Etklen - Twitter Profile

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over 1 year ago

**Harvard is selling. The market is missing the real lesson.** News Harvard is selling $1B of PE funds—5% of their program. That’s not the real story. The real story is how poorly people still misunderstand secondary pricing and GP valuations (or mark-to-market). Secondary pricing isn’t some specific verdict on GP marks. It’s math: cost of capital, asset quality, return targets, duration risk, and the structured lives of funds. Further, Secondary PE is one of the only markets where the asset base decays AND underlying assets reshapes itself constantly. Private equity funds age like bonds. Early on, you’re underwriting fundamental growth. Later, you’re underwriting yield. But unlike a bonds or traditional asset, the portfolio you’re buying in secondaries doesn’t stay static. It changes every quarter. As companies exit—good or bad ones—the underlying value shifts. You might underwrite five portfolio companies in the fund today, and six months later, only three remain. A fund could price at par today, and at an 15% discount six months later, even without any real 'bad news.' The asset itself is a moving target. Good assets leave early. Underperformers might linger. The risk profile evolves deal by deal. And that’s a huge part of what makes secondaries so complex—and so misunderstood. Discounts exist because the risk-adjusted return left in the fund is too small to justify paying full NAV at a buyer’s cost of capital. Required returns vary by buyer, but generally target around 1.4x or a 15% IRR. Funds experience natural return decay over time. Early investments are about real value creation—funds tend to price near NAV or even at a premium. Later in the fund’s life, the return profile looks much more like “yield to maturity”—buyers are purchasing near the peak (a 1.8x mark on the way to a 2.0x target), not at the start. As a result, older funds price at discounts. Not because the companies are poor quality. Not because GPs are mis-marking NAVs. But because the remaining upside is smaller and the time window to realize it is shorter. That’s why you often see mature buyout funds pricing in the 80s. For secondary buyers, late-stage PE investing is about balancing limited upside and time-to-distributions against the return hurdles driven by their cost of capital. Secondary discounts aren’t proof of bad valuations. If you want to truly test a GP’s valuations, watch what happens when real M&A exits print—not when LP interests change hands in the secondary market.

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Eric Klen

@Etklen

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