Discounted deals, swift liquidity and a niche mindset are reshaping the secondary market asset class for institutional investors
This article was produced in partnership with Invico Capital Corporation
Fifteen years ago, Invico Capital Corporation was one of the first Canadian firms to start looking at the secondary market for niche fund strategies, when few investors understood how to value tail-end funds. AJ Jain and his team at Invico focused on exploring the secondary market in hedge funds and credit funds, which ultimately led to the formation of the Invico Secondaries Fund.
Today, as Co-Head of the Institutional Team, Jain leads with experience from 100-plus completed transactions totalling approximately $2 billion, robust underwriting, and a deep network of GP and LP relationships, which keeps deal flow coming.
The discount that makes the difference
Jain explains that while primary investors are investing in blind pools at current market value, secondary buyers step in at a discount, often 30 to 40% below net asset value. This embedded discount acts as a margin of safety and a built-in source of capital gains. “Others will have to lose a lot more before we lose a single dollar,” he notes.
For example, in 2024, Invico completed a secondary transaction in a large private equity fund where approximately 60% of the holdings were publicly traded. The entry discount was a staggering 50%, resulting in an immediate mark-to-market gain. “From our perspective, we were buying liquid, public assets at nearly half-price and taking advantage of structural inefficiencies.”
But not all secondaries are that transparent. When assets are private and information is limited, Jain’s team conducts its own valuation analysis by analyzing industry metrics, potential exit options, and extracting information from GP calls and reports before discounting for the target IRR. It is a deeply methodical approach, layered atop the valuations from auditors, third-party consultants, and GPs themselves. Jain says because downside protection matters more than maximizing upside, “we want early liquidity through a quick exit and not a love affair with the asset.”
Why short duration matters
The focus on late-stage positions lets Invico analyze each asset versus investing in a blind pool. Primary funds ask investors to wager on a ten-year timeline with zero visibility on future holdings. By contrast, secondary buyers see audited financials, speak with management teams, and often realize that there is near-term liquidity as the fund continues to sell assets.
That visibility also clarifies risk. If a company stumbles, the entry discount absorbs much of the shock. Portfolio construction does the rest. For this reason, Invico looks to include multiple strategies in its portfolio depending on the level of risk. Invico’s core strategy encompasses private equity, hedge funds, credit funds, litigation finance, and select real estate investments.
Invico’s portfolio is designed to be diversified by GP strategies and asset classes such that no single investment can dictate returns. “Some positions pay monthly distributions, some are all-or-nothing that we assign little value to in our bids, and some are liquid, where we focus on realizing the NAV discount in the shortest time possible,” Jain says. “This mix keeps the portfolio balanced with investors realizing cash returns without any J-curve as these are tail-end funds.”
The attractive entry discounts have lured more than 200 dedicated secondary funds, most of which manage multibillion-dollar pools. Jain welcomes them, because they seldom bother with the smaller two- to twenty-million-dollar deals Invico prefers. The trade-off is extra legwork, but Invico is able to buy funds at larger discounts due to limited competition and efficient execution.
Unlike some rivals, the firm rarely recycles early distributions into new deals. Capital is returned to investors, freeing the team to wait for the right opportunity. Jain’s standard: invest as if fees did not exist. “I would rather miss a quarter than chase a marginal deal because cash is burning a hole in the account.”
Where the market goes next
A decade ago, Jain feared the secondary wave would crest. Each year proved him wrong. Volume hit a record in 2024, and he believes the asset class is just getting started. Secondaries are now a recognised tool for liquidity as well as return, with PE secondaries generally outperforming primary PE in recent years, he says. That legitimacy is driving larger auctions, but Invico will continue to look for niche secondaries others ignore in terms of size and strategy.
The pandemic showcased this approach. With passenger jets idle, Invico, through one of its GPs, provided equity capital to execute sale-leaseback transactions, primarily involving the latest generation of narrow-body passenger aircraft. The investment began with a pre-seeded portfolio of 35 aircraft, each with average lease terms exceeding 10 years. Today, the portfolio has grown to approximately 60 aircraft, with forecasted levered net returns of 14 to 16%. As Jain notes, “it’s a clear example that agility can outperform scale when timing and pricing are right.”
For allocators navigating the new 40-30-30 portfolio model – equities, bonds, and alternatives – Jain believes that secondaries deserve a closer look. “We sit right in between. We're private, but short duration. We're classified as illiquid, but still generate near-term liquidity,” he says. “We can help smooth out cash flows in a two-year timeline. That’s very different from traditional private equity.”
In his view, even a small allocation to secondaries can lift overall portfolio efficiency in almost any environment.
