Over the last few years, private equity managers have faced several cash flow challenges as the amount of capital committed by investors has exceeded the value that has been deployed in underlying investments.  This has been further complicated by the lack of viable exit opportunities and has meant that many managers are looking to the secondary market to provide needed liquidity. The secondary market has become an essential tool within the private equity ecosystem, allowing both liquidity for existing investors and access points for new ones.

In a secondary transaction, an investor purchases existing interests in a private equity fund or company often at a discount to net asset value (NAV). These transactions generally fall into two categories.  In LP-led deals, limited partners sell their fund interests to meet liquidity needs. In GP-led deals, general partners create continuation funds, allowing them to hold on to specific assets while still giving existing investors an option for liquidity.  In 2024, secondary transaction volume reached a record $162 billion, with $87 billion in LP-led and $75 billion in GP-led deals. For institutions, offloading private equity positions on the secondary market has become a viable exit strategy to provide liquidity, adjust to evolving tax policy, or rebalance their portfolio exposures.[1][2]

As the IPO begins to show signs of life in 2025 following three shuttered years, secondaries have emerged as a flexible and increasingly normalized solution for both existing and new investors. They offer transparency into more mature assets, shorter durations, and potential discounts. However, competition in the secondary space has grown significantly. In 2022, LP buyout funds were typically trading at a 13% discount to NAV. By 2024, those discounts had compressed to around 6%, reflecting increased competition for deals and more efficient pricing. As the margin of safety narrows, investors need to display expertise and be selective to ensure secondaries offer meaningful potential upside.[3]

While secondaries provide practical benefits, primary private equity investments continue to offer a compelling long-term growth profile. In primary transactions, investors provide capital at the beginning of a fund’s lifecycle, giving general partners the ability to drive value creation from the ground up through operational improvements, strategic expansion, or capital restructuring. Although these deals typically come with longer time horizons and less immediate visibility, they provide more direct influence over the company’s trajectory and can offer increased long-term upside, especially when supported by strong alignment between GPs, management teams, and employees.

Primary investments also avoid some of the legacy issues associated with secondary transactions. Secondaries often involve buying stakes in companies that may carry past inefficiencies, complex capital structures, or strategic baggage from prior owners. With primaries, investors generally enter cleanly and with control, allowing GPs to execute their strategy without constraint. Moreover, fee structures in primary deals are often simpler and more transparent, typically limited to standard management fees and carried interest. In contrast, secondaries may include added layers of costs, such as intermediary fees and additional management charges, which can erode net returns over time.

That said, secondaries play an important role in today’s private equity environment. They offer access to mature portfolios, mitigate duration risk, and can help navigate uncertain exit environments. For some investors, especially those seeking near-term deployment and diversification, secondaries can offer advantages. For others with a longer time horizon and the desire to partner in driving company-level value creation, primary deals may remain the preferred path. Ultimately, both primary and secondary private equity investments serve distinct roles in portfolio construction. A balanced approach considering liquidity needs, return objectives, manager expertise, and risk tolerance can help qualified investors thoughtfully integrate private equity into a broader investment strategy.

[1] FS Investments: Fueling Growth: Mid-market PE and the U.S. Economic Boom

[2] Commonfund Blossoming New Era of Secondaries

[3] JPMorgan Guide to Alternatives 4Q 2024

To explore this topic in further detail, please refer to the attached private equity paper, “Unlocking Opportunity: A Deep Dive into the Evolving Private Equity Landscape.”