Constructing optimized private equity programs

Key points


This paper lays out the differences between diversified private equity programs investing in primaries, secondaries and co-investments and analyses important investor outcomes such as J-curve, pacing, out-of-pocket exposure and incremental alpha.


We show that by varying transaction types, geographic exposure and investment strategies one can build portfolios with different characteristics across risk-target, return-target and duration.


Ultimately, each investor has their own objectives – a large public pension scheme will likely have different objectives than a re-insurance firm. Hence the optimal mix across transaction types, strategies and geographies will depend on those objectives and this work attempts to provide insights into how these components can work together.

As a result of the growth of private markets, there is an increasing need to take a more holistic and analytical approach in building private market portfolios, benefitting from the various investment types available and differentiating between more alpha oriented strategies in private markets.

For most institutional investors, primary fund commitments form the fundamental component of a well-planned, scalable and diversified private equity program. Opportunistic strategies such as secondaries and co-investments are derived from primaries and now provide a more nuanced approach to construct a private equity program. We focus on these investment types within the private equity market, although we will also touch on the blurring of lines between private equity and other asset classes, as well as overlaps between these investment types.

We highlight the benefits of both secondaries and co-investments in a broader private equity portfolio and perform quantitative analyses to examine how these investment types impact performance, pacing, J-curve mitigation and risk-reward characteristics.

Complementary profiles

Cumulative net cash flows over time for three transaction types

Cumulative net cash flows over time for three transaction types

Source: BlackRock Private Equity Partners as of 30 June 2021. For illustrative purposes only. BlackRock makes no representations or warranties as to the accuracy or completeness of any past, estimated or simulated performance results contained herein, and further nothing contained herein shall be relied upon as a promise by, or representation by BlackRock whether as to past or future performance results. IRR represents the constant implied rate of return of a series of varying cash flows. TVPI compares the investor's NAV plus cumulative distributions to their total contributions to the fund. Provides the investor's net return experience on a dollar-to-dollar basis, after fees and expenses, without giving effect to the timing of the cash flows.

We find that a balanced, thoughtfully constructed program of primaries, secondaries and co-investments offers clear synergies and has the potential to deliver superior risk-adjusted returns beyond what each of the three transaction types can achieve in isolation. Ultimately, each investor has their own objectives, hence the optimal mix across transaction types, strategies and geographies will depend on those objectives.

Jeroen Cornel
Director, Private Equity Partners
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Kyle McDermott
Associate, Private Equity Partners
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