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Compared to conventional investments like stocks and bonds, alternative investment assets are typically characterized by a lack of liquidity and an expectation that they will  be held until an exit event. When investors in these markets ​do ​require liquidity—and  if they are actually allowed to sell—they are generally forced to offer their interests at  a deep discount to an investment’s prevailing Net Asset Value (NAV). As research suggests, ​10-30% discounts are common​ among many private equity secondary  trades.1

If we accept the NAV as the true reference point for the price of an asset, does it make  sense that these interests trade at such steep discounts? The answer should probably be ​no. But because of the general lack of transparency and volume in these markets, the discount is deemed necessary. Here’s why:

1. Transparency:​ When it comes to making investment decisions, public markets  generally provide greater levels of transparency than private markets. Publicly  traded investments offer investors multiple layers of data, including third-party  research and company financials—giving investors the tools they need to make  informed and confident decisions.

On the contrary, private markets traditionally don’t surface as much data for  investors—there’s generally a lack of information about an asset’s  performance, its financials, and data to support its NAV. If an investor is looking  to assess a commercial real estate opportunity, finding data on market trends  and comparable trades tends to be difficult. Additionally, an owner may not want to publish all data to the public, as it could attract unwanted scrutiny. This opacity can lead to discounts to essentially compensate potential buyers for the  uncertainty in their purchase.

Opacity can also lead to ​information asymmetry​, a particularly destabilizing dynamic for efficient markets. Whenever there is a lack of information parity  between agents in a potential transaction, the agent with less information may have concerns about being fleeced by the agent with more information. In the context of private equity secondary trades, a potential buyer without equal information may be worried that the position they are buying might be a  byproduct of adverse selection. Why is the seller exiting the position and what might they be hiding from me?

2. Volume: ​Private markets typically lack the necessary volume of buyers and  sellers in secondary markets to allow for efficient price discovery. For example,  if a large investor decides to sell a significant stake in a privately held asset on  the Secondary Market, there may not be enough investors who are actively  evaluating opportunities to buy the entire position. Conversely, since there’s  little volume in the market, buyers may not want to spend the time and effort to  evaluate an opportunity. Given this lack of competition in the market due to lack  of liquidity, whenever a seller wants to exit an investment, the discount acts as  an effective means to facilitate transactions.

How Cadre is building a more transparent and liquid marketplace

At Cadre, we’re committed to making private markets less opaque, which is why we created ​Cadre Secondary Market​, a marketplace that lets investors buy and sell  privately held real estate investments in a more transparent and liquid manner. We’re building pipelines to surface data to investors to help them make informed decisions  about an asset’s performance​—​our quarterly reporting increasingly incorporates more data about the asset, from operational metrics such as cost per unit or physical  occupancy, to market and submarket trends.

Our asset valuations are signed off by a third-party auditor semi-annually and fully  audited once a year. Rather than burying assumptions within complex underwriting,  we surface the key assumptions behind our go-forward projections to make it easy for  investors to test and verify our expectations for themselves. Sellers on the Cadre  Secondary Market leverage the same quarterly reporting data to make decisions that  potential buyers do.

Cadre Secondary Market brings together buyers and sellers of commercial real estate to create a more liquid market where participants compete to transact. We understand  that it is not the public market and for that reason, Cadre Secondary Market currently operates at a slight discount to the NAV, attracting potential buyers while allowing  sellers to seamlessly gain liquidity in an otherwise historically illiquid asset class.

Investors who are interested in investing in Cadre’s Secondary Market can learn more here​. To become an investor, please ​request access​ to the Cadre platform.

  1. Multiplicity Partners AG, “Private Equity and Secondary Market Pricing and Volume” Q1, 2019,
About the Author
Cadre is a technology-empowered real estate manager built on institutional diligence enhanced by data.
Educational Communication: The views expressed above are presented only for educational and informational purposes and are subject to change in the future. No specific securities or services are being promoted or offered herein. Performance Not Guaranteed: Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance. Risk of Loss: All securities involve a high degree of risk and may result in partial or total loss of your investment. Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. These materials are not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice. Additionally, these materials are not an offer to sell or the solicitation of an offer to buy any securities or other instruments. Actual transactions described herein are for illustrative purposes only, are presented as of underwriting and are not indicative of actual performance, and were selected based on objective, non-performance factors such as asset-type, geography or transaction date, among others. Certain information presented or relied upon in this presentation has been obtained from third party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.

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