The inner investor in all of us is trained to know that economic downturns signal strife for the market as a whole, including secondaries.
The sliding stock prices, declining home values, heightened jobless claims, and diminishing output that come with a downturn are bound to spawn a reaction in the market — but how sweeping are the impacts? And how can investors prepare?
Let’s dig into the correlation between economic downturns in both the public and private secondary markets and how investors should react.
Most experts break up the economy into four cycles: peak, recession, trough, and expansion. The high returns and income levels that arise in a peak cycle eventually come back down to Earth during a recession, which can be triggered by inflation, a supply shock, or other factors.
According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, industrial production and wholesale-retail sales.”
One might assume that this would have a chilling effect on the secondary market, but that’s not always the case. Thirty-one recessions have occurred in the U.S. since the Civil War, and about half have resulted in positive stock market returns.
At the same time, of the recessions with negative correlation, declining returns lasted an average of 17 months with an annualized cumulative return of -14.8%. That’s a significant downside risk, which emphasizes the importance of a multi-asset portfolio to help investors better weather market friction.
Those who maintain assets in the private secondary market have proven their ability to combat crisis conditions, according to a report by Neuberger Berman’s Private Equity and Institutional Solutions.
The firm studied the economic downturn of the early 2000s, the global financial crisis between 2007-2009, and the 2020 COVID-related market slowdown. It found that private assets historically experienced a less significant drawdown and a quicker recovery than public equities in all three case studies.
Research has shown that private secondary funds have a track record of strong performance across various market conditions, indicating that their success isn’t always timed to a cycle in the market. Historical performance data comes from various industry sources and should not be relied upon to predict future returns. Market conditions vary and past performance does not guarantee future results.
Since 1999, private secondary funds have consistently outperformed primary private equity and public equity during deep public market downturns, according to research by one investment management fund. Additionally, secondaries have outperformed public equities in periods of both rising and falling rates, with an annualized return of about 19% during the five rate cuts from 2019 to 2020.
The private secondary market is more accessible than it once was thanks to platforms like Augment*, which facilitates trades between shareholders of private companies and accredited investors.
Augment enables investors to purchase stock in companies that are not traded on public exchanges. While private markets may react differently to economic conditions than public markets, they carry their own unique risks and may not provide protection during market downturns.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.