Private Equity Secondaries: How Deals Work Behind the Scenes

A private equity secondary is a transaction in which an existing investment in a private fund or its portfolio changes hands. In an LP-led secondary, an investor sells its fund interest (and the remaining unfunded commitment) to a buyer. In a GP-led secondary, the sponsor moves one or more portfolio companies into a new vehicle, usually a continuation fund, and existing LPs choose to cash out or roll over.

Secondaries give LPs a way out of a long-dated, illiquid commitment and give GPs more time with assets they want to keep. This guide focuses on how the deals actually run, which is where most of the friction is.

Why secondaries exist#

Closed-end funds lock up capital for ten years or more. Over that time investors' needs change: a pension rebalances when public markets fall, an endowment wants to reduce the number of manager relationships, a family office needs liquidity, or a bank must reduce private fund exposure for regulatory reasons. On the GP side, a fund may reach the end of its term holding a strong company that would benefit from more time and capital.

Secondary buyers, including dedicated secondary funds, fund-of-funds and some large LPs, provide that liquidity in exchange for pricing that compensates them for diligence, illiquidity and risk.

LP-led vs. GP-led#

Other variations include strip sales, where a fund sells a slice of every holding, tender offers run by the GP for all LPs, and preferred equity solutions in which a buyer provides capital to a fund in return for priority on distributions.

How pricing works#

Secondary prices are quoted as a percentage of NAV at a reference date, typically the most recent quarter-end for which the GP has reported. Between the reference date and closing, the fund keeps calling capital and making distributions, and the purchase price is adjusted for those cash flows.

Assume a buyer agrees to pay 92% of an LP interest's reference-date NAV of $40M, with $10M of unfunded commitment. Between the reference date and closing, the fund calls $2M from the seller and distributes $3M to the seller.

The buyer also takes on the remaining unfunded commitment, now $8M after the $2M call. Deals often split the price into an upfront payment and deferred payments 6–18 months later, which raises the buyer's effective return and lowers the price in present-value terms. Buyers should compare offers on a discounted basis, not on headline percentage of NAV.

The discount to NAV reflects the age and quality of the assets, how much unfunded commitment comes with it, how fresh and credible the marks are, and overall supply and demand in the market.

Running an LP-led transfer: step by step#

1. Seller engagement and data request. The seller (often through an adviser) gathers fund documents, recent capital account statements and financial reports, subject to confidentiality limits in the LPA.
2. Bids and buyer selection. Prospective buyers price the interest, often against the reference-date NAV.
3. Purchase agreement. Seller and buyer sign a purchase and sale agreement covering price, adjustments, deferrals and representations.
4. GP consent. The LPA almost always requires GP consent to transfer. The GP checks the buyer's eligibility, including whether the transfer would jeopardize the fund's 3(c)(1) or 3(c)(7) exemption, partnership tax status or ERISA position.
5. Transfer documents. A transfer agreement, the buyer's subscription documents or joinder, tax forms and KYC/AML on the buyer.
6. Closing and register update. The GP records the transfer effective as of an agreed date, moves the capital account and unfunded commitment, and updates the investor register.
7. Side letter review. Some side letter rights are personal to the original investor and do not transfer; MFN elections may need to be revisited.

Transfers often take longer than the deal itself because of consent queues, legal review and the reconciliation of each party's view of the capital account.

Running a GP-led continuation vehicle#

In a continuation vehicle transaction, the sponsor forms a new fund managed by the same GP, which buys one or more assets from the existing fund. A lead secondary buyer sets the price and terms; other buyers syndicate behind it. Existing LPs then elect to sell at that price or roll their share into the new vehicle.

The central issue is the conflict of interest: the GP is effectively both seller and buyer, and it often gets new carry and fees in the continuation vehicle. Good practice includes:

• A competitive process or independent lead investor to set the price.
• An independent fairness opinion or valuation.
• Review by the LP advisory committee, with full disclosure of GP economics.
• Enough time and information for LPs to make an informed election.
• A crystallization of carry on the existing fund that reflects the transaction price.

The SEC's 2023 Private Fund Adviser Rules would have required a fairness or valuation opinion for adviser-led secondaries, but those rules were vacated by the Fifth Circuit in June 2024. Advisers still owe fiduciary duties and must disclose conflicts, and many LPs expect an opinion regardless, so it remains standard practice.

Accounting and reporting considerations#

Secondaries create work for fund accounting teams on both sides:

• The selling fund records the asset sale, realized gain or loss, and the distribution of proceeds to selling LPs through the waterfall, while rolling LPs receive interests in the new vehicle.
• The continuation vehicle starts a new set of books, with opening capital accounts based on the transaction price, not the old fund's cost basis.
• Transfers of LP interests require moving capital account balances, contribution and distribution history and tax basis information to the buyer, with a defined effective date for allocating income for the year.
• The secondary buyer records the interest at its purchase price, so if it values holdings using the GP-reported NAV, the gap between cost and NAV often shows up as an unrealized gain at the next reporting date. Buyers should document whether and why that mark is appropriate.

Each investor's partner capital account statement is the document most often requested in a transfer. If those statements tie out to the general ledger and history is available on demand, deals move faster.

What GPs can do to make secondaries smoother#

• Keep an investor register with clean contribution, distribution and commitment histories.
• Publish timely, consistent NAV and capital account statements.
• Set a clear transfer policy: who approves, what documentation is required, and fees charged to cover legal costs.
• Track side letter rights and which ones survive a transfer.
• Run KYC and AML checks on incoming investors with the same rigor as at fundraising.

How Privatis helps#

Privatis keeps each LP's capital account, contributions, distributions and documents in one record, so transfers can be processed and reflected accurately. Waterfall calculations support distributions from a sale to a continuation vehicle, KYC/AML onboarding covers incoming buyers, side letter and MFN tracking records which rights move, and the audit trail shows every change made along the way.