Private Equity Funds of Funds Case Studies and Secondaries Case Studies: What to Expect and How to Practice

Funds of Funds Case Studies Definition: You normally complete these case studies when interviewing at a PE fund of funds or endowment/pension/sovereign wealth fund/insurance firm that invests in private equity; the case studies may relate to primary investing in new funds or LP-/GP-led secondary deals in existing funds and specific portfolio companies. Co-investment case studies, similar to traditional LBO models and based on potential new investments, are also possible.

At a time when the private equity industry has been performing poorly, secondary investing – buying and selling stakes in existing PE funds and portfolio companies – has been a “hot” area:

(Source: Jefferies Secondary Market Review.)

Ironically, it’s partially because of the PE industry’s poor performance that secondaries have done well.

Since Limited Partners – investors in PE funds – need liquidity within a reasonable time frame, many are motivated to sell their stakes in funds, even at discounts.

Meanwhile, General Partners – the professionals operating PE funds – often want to retain their best assets for longer to achieve higher returns.

More cynically, some would argue that they do this when they can’t sell their portfolio companies for great prices in the current market.

These trends have generated interest in private equity funds of funds and secondaries roles.

But there’s a surprising lack of information about interviews and case studies.

As with most buy-side interviews, you can expect a mix of fit and technical questions and case studies.

While the exact case study content varies by firm, there are some general guidelines on what to expect:

Getting practice with these case studies is tricky because it’s difficult to find real data, but you can “recreate” co-investment and GP- and LP-led secondary examples.

Primary investment analysis in new PE funds is more challenging, but you can practice by reviewing publicly disclosed data from certain government pensions.

Files & Resources:

• PE Fund of Fund and Secondaries Case Studies – Presentation Slides (PDF)
• Simple PE Fund Analysis (XL)
• Simple GP-Led Secondary Model (XL)

Video Table of Contents:

• 0:00: Introduction
• 1:18: Motivations and Market Overview
• 3:29: Case Study Expectations
• 6:58: Part 1: Primary PE Fund Investing
• 11:29: Part 2: LP-Led Secondary Investing
• 14:11: Part 3: GP-Led Secondaries and Co-Investing
• 15:51: Recap and Summary

Definitions: What Are Primary Deals? LP- and GP-Led Secondaries? Co-Investments?

“Primary deals” refer to investments in new private equity funds, typically established by existing Partners with a track record.

Their previous funds have performed well, and now they want to raise capital to launch a larger fund or one that uses a different strategy.

Since there is no data on this new fund, primary investment case studies typically focus on analyzing the PE firm’s previous funds.

For example, have the returns been consistent? Are they diversified across industries, deal types, and teams? How stable have they been over time?

LP-led secondaries refer to the acquisition of stakes in entire existing PE funds.

For example, let’s say an existing $1 billion PE fund has 20 Limited Partners that have each committed $50 million to the fund.

These “Limited Partners” might be pensions, sovereign wealth funds, endowments, funds of funds, or insurance companies.

One of them wants to sell its $50 million stake because it needs to rebalance its portfolio.

In an LP-led secondary case study, you might analyze this $50 million stake and forecast potential future returns based on the projected sale prices of the remaining portfolio companies and the associated fees (Carried Interest and Management Fees).

GP-led secondaries refer to acquiring stakes in specific assets held by existing PE funds.

A deal could be based on a single portfolio company or a set of portfolio companies.

The main difference is that GP-led secondary case studies tend to be more granular, with more emphasis on cash-flow forecasts.

A single-asset GP-led secondary is effectively a traditional LBO model with a few extra features (see below).

Finally, in co-investment case studies, you analyze potential investments in new portfolio companies that the PE fund does not yet own.

The idea is that the fund needs additional capital to close the deal (or does not want to overcommit to a single deal), so it contributes its standard amount and requests the remainder from its Limited Partners.

Co-investments are similar to single-asset GP-led secondaries in some respects, but the key difference is that they involve new companies rather than existing ones that the PE fund has held for years.

Co-investment case studies are also similar to traditional LBO models, but they also include additional features related to investor alignment and, in some cases, fund-level analysis.

Funds of Funds Case Studies: Primary Investing (Investing in New PE Funds)

Most primary investing case studies take one of two forms:

1. Calculation Exercises – Review a set of fund-level cash flows and create a summary of the invested capital, realized value, unrealized value, Gross MOIC, and Gross IRR by company. You may also calculate the Net IRR (after fees) and fund-level metrics like the Total Value to Paid-In Capital (TVPI) and Distributions to Paid-In Capital (DPI).
2. Fund Recommendations – Evaluate a PE firm’s previous historical funds and make a yes/no investment recommendation for its new fund.

The first case study is mostly about using Excel formulas quickly to get results. Functions such as XLOOKUP, FILTER, SUMIFS, and SUMPRODUCT are essential.

They could also give you a waterfall schedule that requires you to factor in the preferred return, catch-up return, and standard 80% / 20% investment profit split for the LPs and GP, but that is unlikely in a short case.

With the second type of case study (the fund recommendation), the three most important points to evaluate are:

1. The consistency, stability, and distribution of the historical returns;
2. Where the fund has a clear “edge” over other funds in terms of deals, sourcing, or value creation; and
3. Whether the risk factors can be explained or mitigated.

For example, if a PE firm’s past funds have consistently produced Gross IRRs between 20% and 25% and TVPIs of 2.0x+ across multiple industries and deal sizes, this is a positive sign.

But if their returns have been inconsistent or they depend heavily on a specific industry or sourcing strategy, that is a negative sign.

You also want to make sure the PE firm is doing something different to earn its returns; if it’s just bidding on sell-side auctions run by investment banks, that adds little value compared to sourcing proprietary deals.

Finally, if there are significant risk factors, such as a team with high senior turnover, you should be able to explain or justify them (e.g., the turnover was driven by legitimate performance reasons rather than compensation disputes).

As a simple example, consider the 3 buyout funds from the sample Excel file above:

The returns look good initially, but when you dig into the performance by industry and portfolio company status, questions arise:

The previous funds have performed much worse in the Business Services industry, and the Unrealized portfolio companies appear to have substantially less potential future upside than those that have already been sold.

Also, if you review the individual company results, it’s clear that 1 – 2 companies have been “propping up” the returns for each fund:

You would not necessarily reject a commitment to Fund IV based on these observations, but they would be risk factors that warrant further investigation.

Best Practice Methods: Unfortunately, you cannot do much to practice independently here. Our course includes case studies, but outside of that, you can look up public pensions that release periodic performance stats, such as CalSTRS, and read commentary about them.

Funds of Funds Case Studies: LP-Led Secondaries

Most LP-led secondary case studies give you a set of remaining portfolio companies the PE fund holds, along with historical financials, valuation multiples, and each company’s business plan or expected future results.

They might include summary data in the beginning and more detailed financials later (either “cash flow only” projections or full 3-statement models):

You normally start by setting up the fund and transaction assumptions, including the Fair Market Value (FMV) of these companies and the fund’s remaining Net Asset Value (NAV), which equals the FMV minus Accrued Carried Interest.

(Carried Interest is the 20% of the investment profits that the LPs earn on deals, assuming they achieve the standard 8% hurdle rate first. “Accrued” means it has not yet been paid out since these portfolio companies have not yet been sold.)

Then, you create simple cash flow projections for the remaining portfolio companies, which are like “mini-LBO models.”

The goal is to estimate the revenue and EBITDA growth, Debt repayment, Cash generation, and potential exit value for each company.

Your “value-add” in this case study is to fact-check the assumptions the PE fund has made, especially around the company’s future growth, margins, and valuation multiples.

For example, if the company is marked at an aggressive EBITDA multiple vs. the public comps, you might reduce it in the forecasts:

Once you have done this for all the companies, you project the fund-wide cash flows and calculate the returns.

To do this, you’ll pull in the Exit Equity Proceeds for each company based on their projected exit multiples and exit dates, count the upfront price paid for the fund stake as the initial cash outflow, and count the proceeds from these realizations as cash inflows.

All LP-led secondary models should deduct the 20% Carried Interest on profitable investments, and more complex models also count the 1 – 2% Management Fees as cash outflows:

You sensitize the results and then make an investment recommendation based on how well the deal achieves your targeted TVPI and Net IRR in different cases.

Best Practice Methods: Pick 3-4 public companies you follow across different sectors and practice creating “simple LBOs” for them based on cash flows and basic unit economics.

Then, assume their current market values for the upfront price and build a cash-flow model to determine the discount required to achieve your targeted Net IRR or TVPI.

This follows from the LBO valuation tutorial, but applies on the fund level instead.

Funds of Funds Case Studies: Co-Investments and GP-Led Secondaries

These case studies are mostly like traditional LBO modeling tests in which you receive a company’s CIM or annual report, investor presentation, and other information, and then review it and make an investment recommendation.

But there are a few twists:

• Co-Investments: These are the most like traditional LBO models because they’re both about new companies that a firm is considering acquiring. However, the ownership split may be more complex (management vs. LPs vs. GPs), you might challenge the GP’s numbers, you may have to assess the GP’s alignment/motivations, and you may do some quick fund-level analysis as well.
• GP-Led Secondaries: Single-asset deals are like traditional LBO models, but you have to factor in a rollover of the GP’s Accrued Carry in the company, which effectively converts into a common equity stake in the deal. The GP then receives additional Carry in the continuation vehicle (CV) set up to acquire this company. You should also factor in Management Fees for this asset and use the Purchase Price, Management Fees, Exit Proceeds, and Carried Interest to calculate the net returns.

Here are a few simple examples of the investor alignment and performance tests in co-investment case studies:

For the GP-led secondary case studies, you can refer to the simplified file from the course.

Most of the differences relate to the treatment of the GP’s Accrued Carry and the additional Carry granted:

Best Practice Methods: For this one, refer to any of our existing examples for LBO modeling case studies.

Pick a public company you follow, practice building a simple LBO model for it, and add extra features as appropriate.

For example, in a co-investment case study, if $1 billion in Equity is required for the deal, you could try different numbers for the GP’s contribution vs. your contribution as an LP and see how they affect the deal.

You normally want the GP to invest at least 5 – 10% of its total committed capital in this single deal, and for the GP’s contribution to exceed the co-investors’.

Funds of Funds Case Studies: Other Types and Variations

There are other variations on the standard funds of funds case studies as well.

For example, they could ask you to analyze a private credit fund or a venture capital fund, or they could ask you to value an entire General Partner (GP) stake in a fund.

However, most of these extend from the frameworks described above, with a few tweaks.

For example, a secondary deal for a private credit fund would be similar to the outline above (forecast the individual assets, the upfront price, and the selling prices and fees), but the cash flow projections would differ as follows:

• The major components of the cash flows are cash interest payments, fees, and loan principal repayments and maturities; there are no “portfolio company exits.”
• Interest forecasts may factor in more complex terms, such as interest rate floors and spreads and fixed vs. floating rates (and possibly PIK vs. cash interest).
• Management Fees and Carried Interest are lower (e.g., a 0.75% Management Fee and 15% Carry above a 6% Hurdle Rate for a post-investment private credit fund).
• You forecast the Default Rate and Recovery of loans rather than the exit multiples and exit values. These might be based on market trends or the specific company/debt profiles (e.g., 1st lien debt might have a 2% Default Rate with 80% Recovery, and 2nd lien debt might have a 5% Default Rate with 60% Recovery). The loan’s “exit value” is then based on Remaining Face Value Upon Maturity * (1 – Default Rate * Recovery).
• You are less likely to forecast individual companies in depth because private credit funds tend to hold far more positions than traditional PE buyout funds. You may adjust some of the Default Rate and Recovery numbers based on the credit stats and ratios (Debt / EBITDA, EBITDA / Interest, etc.).