Cambridge Associates recommends 10% secondaries allocation

Institutional investors should hold at least 10% of their private investments commitments in secondaries on an ongoing basis, according to an Oct. 30 framework from Cambridge Associates.

The paper, 'Secondaries in Private Investment Portfolios: A Framework for Strategic Allocation,' says secondaries belong in a mature private markets program as a permanent allocation rather than a tactical one. Cambridge Associates says the case for an early allocation is established, and that secondaries remain useful as programs age for portfolio construction, risk management and redeploying capital returned from older funds.

For a private-wealth client, the 10% target is a commitment-pace instruction as much as an allocation. The denominator is total private investments commitments, not net asset value, so the sleeve scales with every new fund subscription instead of sitting at a fixed dollar amount. A client building a $10 million private markets program would keep roughly $1 million of that budget pointed at secondaries.

The paper divides the market into four transaction types: LP sales of existing fund interests, GP-led liquidity offerings (often through continuation vehicles), direct secondaries in individual companies or portfolios, and tailored structured solutions.

The 10% recommendation rests on decades of performance data and Cambridge Associates' simulated portfolio analysis, which it says shows a consistent secondaries allocation producing higher distributions and a higher terminal portfolio value than reduced or no exposure. The analysis is of institutional portfolios, leaving open how far results travel to smaller private-wealth programs.

For managers selling secondaries vehicles into wealth portfolios, a permanent 10% target implies a different product brief from a one-off fill: repeat commitments and terms that allow a fund to keep taking money as a client's other funds are drawn.

Applied to a growing program, the framework implies a re-up discipline: every new private fund commitment needs a corresponding secondaries commitment of about a tenth of its size, or the share slips below 10%. That moves the diligence question from whether to own secondaries to which transaction type a vehicle concentrates in, how its GP-led deals are struck against the marks sellers already carry, and whether the fund can keep buying as commitments roll in.