Secondaries (Private Funds)

Investors in private funds usually commit money for about ten years or more, with few ways to exit early. The secondary market allows them to sell their interests before the fund ends, providing liquidity.

There are two main types. In investor-led or LP-led secondaries, an existing investor sells its stake in one or more funds to a secondary buyer. In manager-led or GP-led secondaries, the fund manager arranges a transaction, often moving one or more companies from an older fund into a new vehicle, called a continuation fund, giving existing investors the choice to sell or roll over their investment.

For example, a pension fund needing to rebalance its portfolio might sell its interests in several private equity funds to a secondary buyer, often at a discount to the funds’ reported net asset value.

Buyers of secondaries can gain exposure to mature funds with known investments, shorter time to returns and often a purchase discount. The secondary market has grown rapidly, especially as slower company sales and listings increased investors’ need for liquidity. Pricing depends on the quality of the assets and market conditions. Secondaries in this sense are different from the secondary market for publicly traded securities.