Private equity has grown to become a core component of institutional investment portfolios. As allocations have grown, investors increasingly need the ability to adjust their private equity exposure as part of broader portfolio management. The illiquid nature of the asset class, however, creates a particular challenge in managing liquidity. Against this backdrop, the secondary market has expanded significantly and developed into an integral part of the private equity ecosystem. In recent years, this role has been further strengthened by subdued exit activity and longer holding periods. While the secondary market provides fund investors with a flexible way to manage their portfolios and generate liquidity, it also offers buyers attractive access to selected, more mature funds and portfolio companies. Our products are only marketed to professional investors.

eQ has been active in the secondary market since the early 2010s and since 2017, secondary investing has been a dedicated strategy. This secondary investment strategy, however, builds on more than 25 years of experience in the Northern European lower mid-market, where eQ is a well-established investor.

We believe that our relationships with leading fund managers, European institutional investors and secondary market advisers provide a strong foundation for successful secondary investing. Ultimately, success in this market depends on the ability to build trust and execute transactions discreetly and efficiently. This is supported by a deep understanding of the funds and assets being acquired and by being a valued long-term partner to the underlying fund manager. We have also acted as a seller in the secondary market in recent years, thereby releasing liquidity to our clients.

Assessment and selection of investment opportunities

Our investment selection process combines an assessment of three distinct but interconnected elements: the fund manager, the fund’s overall situation and outlook, and thirdly the underlying company quality.

We seek resilient situations where quality is evident at all three levels – strong portfolio companies alone are not sufficient if, for example, the continuity of the fund manager is challenged, or historical performance of the fund may not incentivize the manager properly. By evaluating each of these dimensions, we aim to construct an all-weather portfolio capable of performing in challenging times as well.

In addition to assessing the quality of each opportunity, we consider how it fits within the overall portfolio. Alongside geographical and sector diversification, we pay attention to the expected cash flow profile of each investment. We model the return potential and anticipated exit timing of every underlying portfolio company, using this analysis to build a cash flow forecast for the target fund. We are looking for investments that are expected to begin returning capital from the early years of our ownership. This is one of the attractive features of secondary investing: capital is deployed relatively quickly, while distributions should also begin comparatively early. This comes back to asset quality, as the best companies trade even in challenging exit markets, thus also providing greater visibility into future cash flows.

Building a diversified, resilient and high-quality portfolio

Our objective is to build a balanced portfolio diversified across Northern Europe, comprising investments with 15–20 fund managers and exposure to more than 75 underlying companies. We seek to limit exposure to any individual company to approximately 3–4 % of the portfolio. We build this exposure through both acquisitions of individual fund interests and investments in continuation funds established for selected portfolio companies.

We invest primarily alongside managers with whom we already have an established relationship, combining our long-standing experience in manager selection with independent fund- and company-level analysis. Rather than acquiring broadly diversified portfolios of fund interests, we focus on individual funds and managers that we know well and have followed over an extended period.