What Is Secondaries Private Equity and How Does It Work?

Private equity involves capital investment into private companies, aiming to improve performance and sell for profit. These investments are typically raised from institutional investors to acquire ownership stakes, often with majority control. Private equity firms grow a company’s value, then exit through a sale, an initial public offering (IPO), or a secondary buyout. Within this broader landscape, secondaries private equity focuses on buying and selling existing private equity interests, allowing investors to transfer stakes in private equity funds or direct company investments. Secondaries provide a mechanism for liquidity in what is otherwise an illiquid asset class.

Understanding Secondary Private Equity

Secondaries private equity offers investors liquidity for their interests in private equity funds or direct investments, which are inherently illiquid. Unlike public market assets traded daily, private equity investments typically involve long holding periods, often seven years or more, without a ready redemption mechanism.

A secondary transaction transfers an existing investment rather than creating a new one. This distinguishes secondaries from “primary” investments, where capital is committed to a new private equity fund during its initial fundraising. In a primary investment, the fund manager then deploys capital into new companies over time.

This allows the original investor to exit their position before the fund’s natural lifecycle concludes, often spanning a decade or more. The buyer assumes the rights and obligations of that investment, including future distributions from underlying portfolio companies and any remaining unfunded capital commitments.

The secondary market helps investors manage private equity exposure more actively. It allows the sale of an interest in a fund that has already made investments, offering the buyer more transparency into underlying assets than a primary commitment to a “blind pool” fund. This can also lead to a shorter time frame for the buyer to realize returns, as the investment period has already progressed.

Motivations for Secondary Transactions

Different parties engage in secondary transactions for strategic reasons, driven by financial objectives and portfolio management needs. These transactions provide flexibility in an asset class characterized by long-term commitments.

For sellers, such as limited partners (LPs) or general partners (GPs), motivations stem from portfolio rebalancing requirements. Investors may adjust asset allocation due to market changes or internal policies, prompting the sale of an existing private equity interest. Liquidity is a primary driver, particularly if an investor faces unexpected capital needs or seeks to free up capital for new opportunities. Regulatory changes can also compel financial institutions to divest illiquid assets, making the secondary market a viable exit route. A strategic shift in an organization’s investment focus or a desire to divest from non-core or underperforming assets can also lead to a secondary sale.

Buyers, typically dedicated secondary funds, gain immediate exposure to diversified private equity portfolios. Acquiring existing interests means the buyer knows the underlying assets, offering greater transparency compared to committing to a new primary fund. This approach allows accelerated capital deployment, as funds are invested into existing portfolios rather than waiting for new investments to be sourced and executed by a primary fund. Buyers may also find attractive valuations in the secondary market, especially if sellers are motivated by liquidity needs. Investing in mature assets with shorter remaining investment horizons can be appealing, potentially leading to a quicker return of capital compared to the full lifecycle of a new primary fund investment.

Different Forms of Secondary Transactions

Secondary private equity transactions manifest in various forms, each designed to address specific needs of sellers and buyers.

Limited Partnership (LP) Interest Sales

LP interest sales are the most common secondary transaction. An existing limited partner in a private equity fund sells its pro-rata interest to another investor. The buyer steps into the shoes of the original LP, acquiring rights to future distributions from the fund’s underlying investments and obligations for any remaining unfunded capital commitments. This straightforward transfer allows the selling LP to exit their position and gain liquidity, while the buying LP gains exposure to a seasoned portfolio.

Direct Secondaries

Direct secondaries acquire stakes directly in private companies from existing shareholders, rather than through a private equity fund interest. This occurs when a founder, early investor, or corporate shareholder seeks to monetize their ownership in a private business. These transactions require extensive due diligence on the company, as the buyer acquires a single asset or a concentrated portfolio of direct company stakes. Direct secondaries offer buyers more control and direct exposure to the underlying asset’s performance.

Fund Restructurings (GP-Led Secondaries)

Fund restructurings, or GP-led secondaries, are complex transactions initiated by a private equity fund’s General Partner (GP). These typically involve selling remaining portfolio companies from an older fund into a new vehicle, known as a “continuation fund,” managed by the same GP. This structure allows existing limited partners in the original fund to either sell their interests for liquidity or roll their investment into the new continuation fund, maintaining exposure to the assets. GP-led secondaries provide liquidity to LPs who wish to exit, while allowing the GP to continue managing promising assets beyond the typical lifespan of the original fund.

Other Forms

Other forms include stapled secondaries, where a buyer commits to a new primary fund from the same GP in addition to purchasing a secondary interest in an existing fund. This incentivizes buyers by offering access to a new fund alongside the secondary opportunity.

Key Participants in the Secondary Market

The secondary private equity market involves a distinct ecosystem of participants, each playing a specialized role in facilitating the transfer of existing private equity interests.

Sellers

Sellers in the secondary market are institutional investors with significant private equity allocations. This includes pension funds needing to rebalance portfolios or meet benefit obligations, and endowments and foundations seeking to manage liquidity or strategic asset allocation. Family offices and financial institutions also participate as sellers, often driven by portfolio management, regulatory requirements, or a desire to divest from specific investments. Even other private equity funds can act as sellers, for instance, when winding down an older fund or optimizing their portfolio.

Buyers

Buyers are predominantly dedicated secondary funds, specialized investment vehicles designed to acquire existing private equity interests. These funds raise capital from their limited partners and deploy it strategically in the secondary market. Beyond dedicated funds, other large institutional investors like sovereign wealth funds and large pension funds may also act as direct buyers, particularly for sizable transactions. Some family offices and high-net-worth individuals also participate, directly or through specialized platforms, to gain exposure to mature private equity assets.

Intermediaries and Advisors

Intermediaries and advisors play an important role in connecting buyers and sellers and managing the complex transaction process. Placement agents and investment banks market secondary interests to potential buyers and solicit bids. These firms often run structured auction processes to maximize value for sellers. Advisory firms provide strategic advice to sellers on market conditions and structuring options, and to buyers on due diligence and valuation. Their expertise helps navigate the intricacies of private equity transfers, from initial assessment to final closing documentation.

The Secondary Transaction Process

Executing a secondary private equity transaction involves a structured process, beginning with a strategic decision to sell and culminating in ownership transfer. Each step requires careful preparation and extensive due diligence.

Strategic Review and Preparation

The process often initiates with a seller’s strategic review of their private equity portfolio, prompted by liquidity needs, rebalancing goals, or a desire to divest underperforming assets. Once the decision to sell is made, the seller enters a preparation phase, gathering all relevant documentation. This includes financial statements of underlying portfolio companies, the limited partnership agreement (LPA) of the fund, capital call and distribution notices, and investment memos related to the fund’s holdings.

Marketing and Bidding

Following preparation, the interest is brought to market through a marketing and bidding phase. Often facilitated by an intermediary, this involves discreetly contacting potential buyers or running a formal auction process. Buyers submit non-binding indications of interest, which are narrowed down to a select group for further consideration. This competitive process aims to achieve the best possible valuation for the seller.

Due Diligence

Selected potential buyers undertake extensive due diligence. This is a comprehensive review of the financial, legal, and operational aspects of the fund interest and underlying assets. Buyers scrutinize financial models, legal documents, and management reports to assess the quality and prospects of the portfolio. This phase can take several weeks to months, depending on asset complexity.

Negotiation and Documentation

Upon successful due diligence, parties proceed to negotiation and documentation. This involves agreeing on the final valuation, outlining specific transfer terms, and drafting definitive transaction agreements. Key documents include a purchase agreement and a transfer agreement, which legally formalize the change of ownership. These agreements detail the purchase price, representations and warranties, and conditions precedent to closing.

Closing

The closing phase marks the final transfer of ownership and funds, involving execution of all legal documents and wire transfer of the purchase price. Post-closing, ongoing administrative requirements often include notifying the general partner of the fund about the change in limited partner ownership, and ensuring all necessary consents or approvals are obtained.