Private Equity Secondaries Explained: How LP-Led and GP-Led Deals Work

Private equity is famously illiquid. Investors commit capital for ten years or more, and there's no stock exchange where they can sell. The secondary market fills that gap. It lets investors buy and sell existing interests in private funds and, increasingly, lets fund managers hold onto their best assets longer. Once a niche corner of private markets, secondaries have grown into a large, specialised market of their own.

Primary vs secondary

• Primary investment: an investor commits capital to a new fund when it's raised.
• Secondary transaction: an investor buys an existing interest from someone else, or buys into assets from an existing fund through a new vehicle.

Secondaries happen in all private market asset classes, including private equity, venture capital, real estate, infrastructure and private credit, but private equity is the largest segment.

The two main types

LP-led secondaries

An existing limited partner sells its interest in one or more funds to a secondary buyer. The buyer takes on the seller's position, including its share of the fund's current investments and any unfunded commitments still to be called.

Why LPs sell:

• Portfolio rebalancing, for example when public market falls leave private assets overweight relative to targets (the "denominator effect").
• Liquidity needs.
• Reducing the number of manager relationships.
• Exiting a strategy or asset class.
• Regulatory changes affecting how much private capital certain institutions can hold.
• Tail-end funds: old funds with a few remaining assets that take up administrative time.

GP-led secondaries

Here the fund manager initiates the transaction. The most common form is a continuation vehicle:

1. The GP has one or more strong assets in an older fund that's nearing the end of its life.
2. The GP sets up a new vehicle (the continuation fund) to buy those assets from the old fund.
3. Secondary investors provide the capital for the purchase.
4. Existing LPs in the old fund choose either to sell (taking cash) or to roll their interest into the new vehicle.
5. The GP continues managing the assets, usually with new fee and carry terms.

Continuation vehicles can hold a single asset or several. Single-asset deals concentrate risk on one company, so buyers diligence them closely.

Why GP-led deals have grown

• More time for winners. Managers can keep growing a strong company instead of selling at a fixed fund end date.
• Liquidity for LPs who want it, without forcing a sale of the whole company.
• Difficult exit markets. When IPOs and sales slow, continuation vehicles provide an alternative.
• A crystallisation event for carry on the old fund, which is one reason LPs scrutinise these deals carefully.

Conflicts of interest in GP-led deals

The GP sits on both sides of a continuation vehicle transaction: selling from the old fund and buying for the new one. That creates an obvious conflict over price. Safeguards commonly include:

• a competitive process run by a secondary adviser to set the price,
• a fairness opinion from an independent party,
• approval from the fund's LP advisory committee,
• a genuine option for existing LPs to sell or roll on similar terms,
• the GP rolling a significant part of its own carry or capital into the new vehicle, showing it believes in the price.

Industry bodies such as the Institutional Limited Partners Association (ILPA) have published guidance on best practices for GP-led processes. Regulators in some jurisdictions have also paid attention to these transactions.

How secondaries are priced

Secondary prices are usually quoted as a percentage of net asset value (NAV), the fund's reported value of its holdings.

• Below 100% of NAV means a discount: the buyer pays less than the reported value.
• Above 100% means a premium.

Pricing depends on:

Why investors buy secondaries

• Mitigated J-curve: buyers acquire mature portfolios, so they often see distributions sooner than in a primary commitment.
• Visibility: buyers can see the actual underlying assets rather than committing to a blind pool.
• Discounts: purchasing below NAV can boost returns.
• Diversification across vintages, managers and companies.

Risks include paying too much for assets that are overvalued in reported NAV, concentration in single-asset deals and the complexity of evaluating many underlying holdings quickly.

Who participates

• Dedicated secondary funds, which raise capital specifically to buy secondary interests.
• Fund of funds and multi-strategy managers with secondary allocations. See our fund of funds guide.
• Pension funds, sovereign wealth funds, insurers and endowments buying directly.
• Family offices, often in smaller transactions.
• Secondary advisers, investment banks and specialist firms that run sale processes.

Venture capital secondaries

Venture secondaries include LP interests in venture funds and also direct secondaries, where existing shareholders of startups (early investors, founders or employees) sell shares to new investors. Direct secondaries have become more common as companies stay private longer. Startups typically control these sales through rights of first refusal and transfer restrictions, so any sale needs company involvement.

The process for an LP sale

1. Decide what to sell and set objectives: price, speed, simplicity.
2. Hire an adviser for larger or complex portfolios.
3. Prepare data: fund documents, recent reports, cash flow history.
4. Run a process, typically inviting several buyers to bid.
5. Select a buyer and negotiate the purchase agreement.
6. Obtain GP consent for the transfer, which is required under most fund agreements.
7. Close, usually with an effective date (the reference date for pricing) earlier than the closing date.

Trends to watch

Secondaries have become a mainstream portfolio management tool rather than a sign of distress. GP-led transactions have grown into a large share of the market, and new structures, such as NAV-based financing and partial sales, continue to emerge. For investors and managers alike, understanding secondaries is now part of understanding private markets.

Key terms you'll hear in secondaries

• NAV (net asset value): the fund's reported value of its investments, the reference point for pricing.
• Reference date: the date of the NAV used to price a deal, typically a recent quarter end. Cash flows after this date are adjusted at closing.
• Unfunded commitment: capital the LP has promised but not yet been asked to contribute. The buyer assumes it.
• Tail-end fund: an older fund with few remaining assets.
• Strip sale: selling a slice of every position in a portfolio rather than whole positions.
• Tender offer: a GP-led process where a buyer offers to purchase interests from any existing LPs who want to sell, often combined with a new commitment to the GP's next fund.
• Deferred payment: part of the purchase price paid later, which increases the effective price for the seller but adds credit risk.
• Preferred equity: a structure where an investor provides capital to a fund in return for a priority claim on distributions, used as an alternative to a full sale.

What sellers should consider before selling

Selling an LP interest is often a sensible portfolio decision, but it has costs. Sellers give up any future upside on the assets and usually sell at a discount. Before going ahead, compare the sale price with the expected value of simply holding the interest to maturity, factor in the administrative cost of holding many small positions, and consider the relationship with the GP, since some managers view frequent selling negatively when deciding who gets allocations in future funds.