A new white paper from the Paris-based buyer argues DPI is the new IRR with small-cap
secondaries funds excelling on this metric.
Small-cap secondaries funds are punching above their weight from a distribution to paid-in capital perspective - a performance metric closely monitored by limited partners allocating into private markets at a time where realisations have slowed.
A new report from Seine Capital - a Paris-based buyer focused on the lower end of the secondaries market - has found small-cap secondaries funds outperform their mid- and large-cap peers on DPI.
The report - titled DPI is the new IRR - found that the median DPI for small-, mid-, and large-cap 1984-to 2024-vintage secondaries funds was 1.43x, 1.14x and 1.04x, respectively. Top quartile small-cap funds delivered a 1.74x DPI, higher than mid-cap's 1.42x and large-cap's 1.43x.
Ultimately, that leads to "higher realised upside for investors seeking outsized returns", according to the report. Bottom quartile figures suggest small-cap funds provide less downside risk, with those vehicles returning a 0.63x DPI. Mid- and large-cap funds returned 0.25x and 0.26x, respectively.
Small-cap funds typically have a higher discount and that plays a substantial role in their over performance in DPI due to a mismatch of supply and demand, the study said. This mismatch leaves lots of opportunity for small-cap buyers to cherry-pick their transactions.
Furthermore, deals in this part of the market are more relationship-driven, allowing sophisticated buyers to better source proprietary deals and forecast future cash flows.
All eyes on DPI
Of the 110 global investor respondents to Coller Capital's Global Private Capital Barometer published last year, 38 percent of respondents expected to increase their allocations to secondaries over the next 12 months - making it the second-most in-demand private markets strategy behind private credit.
In an environment where investors have their focus on getting cash back, DPI is "the new king in town" as a preferred performance metric used by allocators over those focused on unrealised gains, Seine partner Chad Zidow told Secondaries Investor.
The report found secondaries funds outperform all private capital strategies from a DPI perspective - with categories showing modest outperformance to meaningful.
Zidow said there is a "bit of a cyclicality to the investor psyche" and that after riding high in 2021 and 2022, investors are facing a liquidity crunch, which is where the focus on DPI can be helpful. There will undoubtedly be cycles where IRR and other metrics become the sole focus.
"I think that the investor psyche resets every five to 10 years with some of these macro forces," Zidow said. "It's really hard to say, but we can be pretty sure that the next few years are going to be very, very important to deliver a DPI to LPs."
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