Secondary transaction
The sale of an existing fund interest from one investor to another.
An LP may sell its stake to raise cash or rebalance. A GP-led secondary moves assets into a new vehicle, often called a continuation fund. Transfers usually need the manager's consent under the LPA.
The secondary market has grown into a large, mainstream part of private markets, with annual volume well over $100B in recent years. LP-led sales let investors rebalance or raise cash, while GP-led deals, such as continuation funds, let managers hold onto strong assets longer while giving existing LPs the option to sell.
Buyers usually price fund stakes as a percentage of the latest net asset value, at a discount or premium depending on the asset type, fund age and market conditions. The buyer takes on the seller's remaining unfunded commitment, so the manager checks the buyer can meet future calls.
Worked example
An LP holds a $5M commitment to a 2020 vintage fund, has paid in $3M and its share of NAV is $3.6M. It sells to a secondary buyer at 90 percent of NAV, receiving $3.24M. The buyer also takes on the $2M unfunded commitment, and the GP approves the transfer after KYC checks.
Common questions about secondary transaction
Can an LP sell its stake in a fund?
Yes, but usually only with the GP's consent under the LPA. The buyer must be acceptable to the GP, pass KYC checks and take on the remaining unfunded commitment.
What is a continuation fund?
A new vehicle set up by a GP to buy one or more assets from an existing fund. Existing LPs can sell and receive cash or roll their stake into the new vehicle, usually with a secondary buyer leading the deal.