Private Equity Secondaries: Benefits & Challenges

Private equity secondaries have become popular over the last few years for allocators due to their various benefits, mainly their ability to provide liquidity. However, their illiquid nature also poses some challenges, mainly around exiting investments, valuations, and unpredictable cash flows.

Key Takeaways

• There are two types of private equity secondaries transactions: those led by a limited partner (LP) and those led by a general partner (GP).
• While historically LP-led private equity secondaries transactions have been more popular, GP-led ones have become more active.
• Private equity secondaries present benefits for allocators, including their ability to provide liquidity, along with active portfolio management and controlling the denominator effect.
• Private equity secondaries also present challenges for investors around exiting investments, complex valuations, and unpredictable cash flows.

What Are Private Equity Secondaries?

The private equity secondary market refers to the buying and selling of LP interests and remaining commitments to private equity funds during a fund’s lifetime.

To avoid confusion, when referring to both private equity secondaries and direct investments into private equity funds, these direct investments are often known as primary private equity.

What Are the Types of Private Equity Secondaries?

There are two types of private equity secondary transactions: those led by an LP and those led by a GP. LP secondary transactions have historically been more common than GP-led ones. However, GPs have surged in recent years, with the total value of these transactions reaching nearly $115bn in 2025, accounting for 48 percent of total secondary market activity.

LP-led secondary transactions occur when an existing LP sells its assets to a secondary buyer. The buyer, without prior investment in the fund, then replaces the LP with all their rights and obligations.

In GP-led secondary transactions, the GP often forms a new continuation fund to acquire assets (single or multiple) from a predecessor fund. In essence, the GP is on both sides of the transaction. GP-led secondaries can offer attractive benefits in a range of market conditions because they allow flexibility for GPs to hold their most promising assets longer and provide the possibility for added exit options.

What Are the Key Benefits of Private Equity Secondaries?

Secondaries have become a pivotal part of the broader private equity landscape because of their various benefits.

• Secondary markets provide liquidity for existing investors. As mentioned above, this factor was the key driver in creating the original secondary opportunity to provide an exit mechanism before the fund’s natural end. Since then, liquidity has continued to play a pivotal role in the growth of the asset.
• Active portfolio management. LPs have the ability to rebalance and/or reduce overexposure to a sector or manager or meet regulatory capital requirements. Managing the denominator effect. When public markets fall, and a private equity manager’s share of a portfolio might become oversized, selling secondaries helps the investor rebalance without waiting for fund wind-downs.
• Forced sellers create lower prices. Secondaries frequently trade at a discount to NAV, which can be attractive to new investors, providing a built-in margin of safety and return enhancement.
• Secondaries give GPs an approved, accepted continuation vehicle. GP-led secondaries allow them to avoid selling down when they might not want to via an investment vehicle that LPs trust and that gives them ample opportunity to proceed as they wish.
• Buyers already know what’s in the portfolio. Unlike the black box that often represents investing in private equity funds, with secondaries, buyers already know what the portfolio holds with respect to sector exposures, concentration risks, and geographic composition. They can thus conduct significantly more in-depth due diligence, including company-level analysis.
• Secondaries have multiple layers of due diligence: Secondaries allow for more due diligence, and by nature, more due diligence is built into the process. A buyer of secondaries knows that the original PE firm conducted due diligence on the original investment, the initial LP conducted due diligence on the GP, and the secondaries manager conducted due diligence as well on both the GP and the underlying portfolio.
• Diversification. Diversification is one of the most compelling benefits of secondaries to investors to reduce overall portfolio risk. These include diversification among vintage year, strategies, sectors, geographies, and stage of investment, whether early growth, late growth, or mature buyout.
• Faster returns. Returns are faster due to a shortened J-curve, a trendline that depicts an initial loss followed immediately by a large gain. Buyers who invest in a PE secondary fund benefit from a reduced time until cash is returned to LPs.

What Challenges Do Private Equity Secondaries Have?

There are potential drawbacks to PE secondaries, including:

• Illiquidity poses challenges to exiting investments. Although secondaries can help investors hurdle some of the liquidity issues their PE investments present, private equity is intrinsically illiquid compared to public assets. Once in, it can be difficult to exit the investment prior to the fund’s completion.
• Complex valuation. In the secondary market, companies’ valuations can be challenging to determine due to an outdated NAV and a portfolio’s complexity; the assets’ actual value may differ from the price paid.
• Unpredictable cash flows. Secondary investors don’t control when they receive cash. It is dependent upon distributions, making it essential to choose experienced managers who have a keen eye on down-market protection and have a demonstrated record of getting through market cycles.

Outlook for Private Equity Secondaries

The outlook for private equity secondaries appears constructive. Allocators are expected to leverage secondaries across a diverse array of private markets strategies to rebalance and consolidate their underlying managers. While some industry projections suggest continued rapid growth through 2030, outcomes will depend on macro conditions, exit activity, and capital availability. If current trends persist, secondaries can be expected to become a permanent component of private market portfolios.

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