What Are Secondaries in Private Equity?

In private equity, the term “secondaries” refers to the buying and selling of existing commitments by investors in PE funds. In short, they are the disposal of shares by investors who wish to liquidate their positions early.

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In this article, we will discuss what are secondaries in private equity, seeking to understand how they provide early liquidity to a market traditionally considered illiquid. We will also focus on how limited partners can sell their shares ahead of the fund’s natural maturity and the importance of private equity secondaries​ in portfolio management.

Understanding Private Equity Secondaries

Private equity secondary market represents the area in which existing interests in PE funds are bought and sold, typically by investors seeking to exit their commitments early. Unlike primary transactions, in which investors subscribe to shares in a newly formed fund, secondary transactions involve the disposal and purchase of existing shares with a partial or full track record. 

This market allows investors to sell their shares in advance of the fund’s natural maturity, providing funding for the entire sector. At the same time, it allows investors keen to invest in vehicles that are already up and running with a solid track record to do so with reduced uncertainty.

How the Private Equity Secondary Market Works

The life cycle of a secondary transaction follows a standard procedure that is useful for investors to raise capital.

• Initiative of the seller: The initiative typically begins with a seller (institutional, such as a bank or a family office) seeking to raise cash or rebalance their portfolio.
• Price negotiation: Once the owner decides to sell, the negotiation phase begins. The seller calculates the deal value based on Net Asset Value (NAV) and current market conditions.
• Legal and fund manager approval: Once the parties agree on the price, the General Partner must legally approve the transfer.

The timing varies significantly and, of course, changes substantially depending on the agreement’s complexity. Generally, closing takes place within four months.

Types of Private Equity Secondaries

Secondary transactions in PE can be divided into three main types.

• LP Interests: This is the most common type of secondary transaction and involves the transfer of a Limited Partners share to a fund. A typical example is a pension fund that decides to sell its stake in a buyout one with five years remaining to maturity.
• Direct Secondaries: This refers to the direct deal of holdings in one or more portfolio companies. An example would be an investment company selling its stake in a technology startup before its planned exit.
• Structured Secondaries: A very complex type of transaction useful for restructuring existing equity secondaries funds or providing capital to certain investors while maintaining control of the vehicle. An example here could be a fund that gives existing investors the option to exit early while fresh buyers take over on tailor-made financial terms.

Who Participates in Secondaries Private Equity Transactions

In secondaries private equity, there are mainly three parties involved.

• Sellers: Among those who decide to exit investment early are pension funds, endowments, banks, and family offices.
• Buyers: These are institutional investors or secondary funds interested in accessing mature portfolios with greater visibility on returns.
• Intermediaries: Brokers and private equity advisors (what does a private equity lawyer do?) assist in structuring the transaction, valuing the portfolio, and negotiating the terms.

Motivations for Selling in the Secondary Market

The reasons that drive an investor to sell on the private equity second market are varied and often based on strategy. A primary factor is portfolio rebalancing: in the event of overexposure to private equity, the investor may reduce risk by selling shares. Other times, the decision stems from money needs, especially for funds in the closing phase or institutions that require immediate resources. Finally, regulatory or internal changes, such as updated investment policies or compliance constraints, may prompt an investor to exit a fund early on the secondary market.

Benefits of Buying Private Equity Secondaries

Buying private equity second market investments provides numerous advantages to investors, especially compared to primary investments:

• Immediate exposure to mature investments: One of the main benefits is access to funds that are already up and running with partially or fully built portfolios. Buyers can thus avoid the typical early stage of PE where returns are negative or zero—known as the J-curve—and benefit from cash flows sooner.
• Greater visibility of fund performance: Unlike primary investments, which rely on future forecasts, investors evaluate secondary investments using actual data.
• Often discounted price relative to NAV: Secondary market shares are sometimes purchased at a price lower than their NAV, especially if the seller is in a hurry to liquidate.

Risks and Challenges in Secondaries Transactions

Secondary transactions provide attractive opportunities, but they are never easy to navigate. Investors must contend with a number of practical challenges:

• Complex valuations: Understanding the true value of a fund share is never straightforward. NAV can be a starting point, of course, but it often does not reflect the real value of the underlying assets at the time of the transaction.
• Manager approval: To complete the transaction, you need the fund manager’s approval. A formality? Not always. Sometimes it takes longer, and sometimes you don’t get the green light at all.
• Legal aspects and structure: There is a fair amount of bureaucracy involved: documents to prepare, clauses to review, agreements to adapt. It is not uncommon to have to rework contracts.
• Timing and data are not always aligned: The value of shares also depends on the context, which can change rapidly. The problem is that analysts often base the valuation on data from periods that have already passed.

Market Trends and Growth in the Secondary Market

After critical moments such as 2008 or the post-COVID period, many investors found the secondary market to be a quick way to reorganize their portfolios and recover capital. From then on, the sector took a different direction. Traditional LP sales have given way to much more complex transactions, often managed directly by GPs. Today, secondary transactions are no longer a fallback option: they are increasingly attracting pension funds and institutional investors, who see them as a powerful lever to balance risk, return, and ESG investing in private equity. The context has evolved, and so has the approach.

Legal Considerations in Secondary Transactions

Secondary transactions also require legal attention. The clauses contained in the underlying contracts may include transfer restrictions, pre-emption rights, or formal obligations that must be complied with, under penalty of delays or blocks. The buyer and seller must then undergo a thorough due diligence process, both to clarify the risks and to avoid future disputes. Tax issues also come into play: rules and taxes vary greatly from one jurisdiction to another. In all this, legal support becomes essential: keeping all the pieces together and bringing the transaction to a smooth close is often a matter of experience.

Secondaries vs. Other Exit Strategies

Compared to IPOs or trade sales, secondary transactions present a more discreet, rapid, and flexible exit. They do not directly involve the target company and allow for the transfer of all or part of the business. They are ideal when liquidity is needed but the context does not allow for more traditional strategies. For GPs, they are also an effective way to manage different needs without disrupting the entire portfolio.

FAQs

What are secondaries in private equity?

These are transactions in which investors buy or sell shares in existing funds or portfolios.

Why do investors sell in the private equity secondary market?

For various reasons, such as to free up capital, reduce exposure, or rebalance portfolios for funding or regulatory purposes.

Who buys secondaries private equity interests?

The main buyers are specialized secondary funds, institutional investors, and sometimes large PE firms seeking exposure to mature investments.

Are secondaries less risky than primary investments?

It depends. They provide greater visibility on assets but still carry the risk of inaccurate valuation and performance.

How big is the private equity secondary market?

The annual transaction volume exceeds $100 billion worldwide and continues to grow.

References

Jefferies. (2024). Global Secondary Market Review – 2023 Year-End Review. Jefferies Financial Group. https://www.jefferies.com/News/CompanyNews/Jefferies-Releases-2023-Global-Secondary-Market-Review/2348678 

Preqin. (2023). Private Capital Secondaries Report 2023. Preqin Ltd. https://www.preqin.com/insights/research/reports/private-capital-secondaries-report-2023 

Campbell Lutyens. (2023). The Evolving Secondary Market: Trends and Opportunities. Campbell Lutyens. https://www.campbell-lutyens.com/insights/the-evolving-secondary-market-trends-and-opportunities/