A late primary is a private equity fund that is still in its fundraising phase but already has a high percentage of assets in the portfolio at entry. We consider a fund to be a late primary investment if it has at least 30% deployment or more than 50% of its portfolio allocated. Late primary investments are typically characterised by an immediate valuation uptick for LPs due to existing portfolio assets, primary-like terms and rapid capital deployment.

This type of investment presents a unique return profile compared to traditional primary fund commitments. The difference in entry timings allows late primary investors to achieve a considerably higher IRR compared to investing at first closing, while the MoC remains similar, albeit slightly lower. This discrepancy is driven by the shorter capital exposure and faster deployment in late primary deals, which results in an immediate uptick in fund valuation. Moreover, the equalisation fees charged to late closers to compensate for entering the fund at a later date tend to be lower than the fund’s expected IRR, contributing to the IRR uplift despite the equalisation cost.

To exemplify our argument, we present a case study of how late primary investments can enhance IRR. In this example, an investor in the first closing entered at Q1-2025 while an investor in a subsequent closing entered at Q1-2026, at which point the fund could be considered a late primary. Although both investors get a similar MoC (2.6x for the first closing investor and 2.5x for the late primary investor), the late primary investor achieves an IRR of 36% compared to 30% for the investor who entered in the first closing.

Another key advantage of late primary investments is their ability to mitigate the J Curve. The J Curve effect is a common phenomenon that describes the typical trajectory of a fund’s returns over time. In the early years, investors experience negative returns due to upfront costs, management fees, and slow capital deployment, creating the initial dip in the performance of their investments. As the fund matures, value creation through operational improvements, revenue growth and exits starts materialising, leading to positive returns and forming the upward sloping shape of the J Curve.

Late primaries are typically more mature and have a seeded portfolio with several assets, some of which have had time to realise a portion of their value creation plan and generate a valuation uptick, helping avoid the early period of negative returns. As a result, there is an immediate uptick in valuation, faster return realisation, and improved IRR at the cost of only a small decrease in MoC. Such factors make late primary investments a compelling strategy for optimising private equity exposure and helping to mitigate the J Curve.

While late primaries offer advantages like J Curve mitigation and higher IRRs, they also have some disadvantages that investors must consider. Late primary investments are often associated with funds that faced challenges in their initial fundraising stages. This may indicate a less attractive or more uncertain investment opportunity, as top-tier or established managers usually raise capital more quickly. A slow fundraising process could also suggest weaker deal flow, less competitive positioning or investor hesitation. Additionally, investors must consider the equalisation amount when entering a late primary. If the equalisation cost is too high, the benefits of a higher IRR may be mitigated, making the entry point less favourable.

Taking into account all the information and Qualitas Funds’ experience, we have learned several key lessons which guide us in selecting late primary opportunities. First, it is important to prioritise portfolios with high visibility over total assets to prevent prolonged periods of companies valued at cost. Also, it is important to verify that the TVPI uptick is largely driven by defensible performance improvements, such as EBITDA growth or deleveraging rather than aggressive multiple upticks. Another important consideration is the equalisation amount which should be carefully evaluated to assess the viability of the investment. Finally, it is important to consider the overall quality of the GP by analysing its track record, sourcing capabilities and team setup to determine the potential alpha that can be generated in subsequent deals that have not been incorporated into the portfolio yet.

In conclusion, late primaries offer the advantage of a higher IRR compared to a traditional primary investment and help mitigate the J Curve by reducing the initial period of negative returns and accelerating value realisation. However, it is important to exercise a disciplined and complete due diligence process before investing to ensure these benefits are not mitigated by potential risks, such as aggressive multiple upticks during valuations or high equalisation cost. Hence, at Qualitas Funds we only invest in late primaries when these risks have been mitigated and the opportunity aligns with our investment criteria, ensuring both efficient risk management and long-term value generation.