How Do Private Equity Secondaries Work? A Guide for Investors

Private equity secondaries provide investors with access to existing private market investments rather than newly issued interests. In other words, instead of committing capital to a new private equity fund at the beginning of its investment cycle, an investor can acquire an existing interest from another investor.

So, how do private equity secondaries work? In a typical transaction, an existing investor sells an interest in a private equity fund, company, or other private market asset to a new investor through a negotiated transaction. The buyer then assumes the economic interest in the investment and, where applicable, future funding obligations.

The private equity secondary market has therefore become an important part of the broader private markets ecosystem. For investors, secondary transactions can provide access to more mature investments, while for existing investors, they can create a potential path to liquidity before the underlying fund or investment reaches its traditional exit.

Moreover, the market includes several transaction structures. Moreover, the market includes several transaction structures. Investors generally divide these transactions into two principal categories: LP-led secondaries and GP-led secondaries. Each category has a different transaction structure and investment profile.

What Are Private Equity Secondaries?

Private equity secondaries are transactions involving the transfer of an existing private equity investment from one investor to another.

Unlike primary private equity investments, where investors commit capital directly to a newly formed fund or newly issued investment, a secondary transaction involves an existing investment. As a result, the buyer may gain exposure to a portfolio that has already been developing for several years.

For example, an institutional investor may hold an interest in a private equity fund but decide that it needs liquidity, wants to rebalance its portfolio, or wants to reduce its exposure to a particular manager. That investor can potentially sell its interest to another qualified buyer through the secondary market for private equity.

The buyer, meanwhile, acquires an existing position rather than starting from the beginning of the fund’s investment period. Therefore, secondary private equity investments can have a different cash-flow profile and investment timeline from primary commitments.

Importantly, a secondary transaction does not necessarily mean that investors sell the underlying companies. In an LP-led transaction, for example, the ownership interest in the private equity fund changes hands while the fund may continue to own and manage its portfolio companies.

How Does the Private Equity Secondary Market Work?

The private equity secondary market connects sellers of existing private market interests with buyers seeking exposure to those investments.

First, the seller identifies an investment or portfolio that it wants to sell. The seller may be seeking liquidity, portfolio rebalancing, capital recycling, or another strategic objective.

Next, potential buyers evaluate the opportunity. This process can involve reviewing the underlying fund, portfolio companies, financial information, investment strategy, remaining investment period, historical performance, and expected future distributions.

Then, the buyer and seller negotiate the transaction terms, including the purchase price and other contractual conditions. Depending on the structure, the buyer may also assume future capital commitments associated with the acquired interest.

Finally, once the transaction receives the required approvals, the buyer completes the transaction and becomes the new holder of the investment interest.

Because buyers and sellers negotiate these transactions privately, pricing can differ from the reported net asset value (NAV) of the underlying investment.

What Are LP-Led Secondaries?

LP-led secondaries occur when a limited partner (LP) sells an existing interest in one or more private equity funds.

In practice, an LP may decide to sell because it needs liquidity, wants to rebalance its private markets portfolio, or wants to reduce the number of fund relationships it manages.

The buyer acquires the existing fund interest from the selling LP. As a result, the buyer gains exposure to the underlying portfolio and future distributions associated with that interest, subject to the terms of the transaction.

LP-led secondary transactions can involve a single fund interest or a diversified portfolio of interests. Therefore, they can provide buyers with different levels of diversification depending on the structure and assets involved.

What Are GP-Led Secondaries?

GP-led secondaries follow a different structure because the general partner (GP) plays a central role in initiating the transaction.

Typically, a GP may have one or more attractive portfolio companies that require additional time to reach their full potential. Rather than selling those assets immediately, the GP may establish a continuation vehicle that allows the assets to remain under the sponsor’s management for a longer period.

Existing investors may receive liquidity, while new investors provide capital to the continuation structure.

In contrast to LP-led secondary transactions, the focus of a GP-led transaction is often on specific assets or a concentrated portfolio rather than simply transferring an LP’s interest in an existing fund.

Continuation vehicles have become an increasingly important structure within the GP-led secondary market, particularly as private equity sponsors look for additional flexibility around investment exits.

Why Do Investors Consider Secondary Private Equity Investments?

Investors consider secondary private equity investments for several reasons, particularly when they want access to established private market assets. Unlike a traditional primary investment, a secondary investment gives the buyer an opportunity to acquire an existing position that may already have a history of performance and underlying portfolio activity.

For example, an investor may acquire an interest in a private equity fund several years after the fund originally began investing. As a result, the investor may gain exposure to companies that are already further along in their development.

Another potential advantage is portfolio diversification. In addition, secondary investments can provide access to multiple underlying companies through a single fund interest or portfolio transaction.

However, investors should not assume that secondary investments are automatically less risky than primary investments. Instead, each opportunity requires careful analysis of the underlying assets, valuation, remaining investment period, fund manager, transaction structure, and potential future cash flows.

Furthermore, secondary transactions can offer flexibility to investors who want to construct a private markets portfolio with different investment dates and maturity profiles.

Private Equity Secondaries vs. Primary Investments

Understanding the difference between primary and secondary investments is essential when evaluating private markets opportunities.

A primary private equity investment generally involves committing capital to a fund or investment at the beginning of its investment cycle. The fund manager subsequently deploys that capital into portfolio companies according to the fund’s investment strategy.

By contrast, a secondary transaction involves purchasing an existing private equity interest from another investor.

This distinction can affect the investment timeline. For instance, a primary fund commitment may require investors to wait several years before significant realizations occur. A secondary investment, on the other hand, may provide exposure to a portfolio that has already been built.

Primary Private Equity Investment:

• Capital is committed to a new fund or investment.
• The investment portfolio is built over time.
• Investors typically have a longer investment horizon.
• Capital calls may occur throughout the investment period.
• Returns depend on the future development and exits of portfolio companies.

Secondary Private Equity Investment:

• An existing investment is acquired from another investor.
• The underlying portfolio may already be established.
• Investors can potentially access more mature investments.
• The transaction price is negotiated between buyer and seller.
• The remaining investment period may be shorter than for a new fund.

Therefore, secondary investments can complement traditional private equity allocations rather than simply replacing them.

What Should Investors Consider Before Investing?

Although private equity secondary investments can provide access to established private market assets, investors should conduct thorough due diligence before committing capital.

First, investors should understand exactly what they are acquiring. This includes reviewing the fund, underlying portfolio companies, ownership structure, investment strategy, remaining commitments, and expected distributions.

Second, valuation is critical. The purchase price may be negotiated at a premium or discount to the reported net asset value of the underlying investment. Therefore, investors should evaluate both the current valuation and the potential future value of the assets.

Due Diligence

Due diligence helps investors understand the quality and potential risks of a secondary opportunity.

In particular, investors may review:

• Historical fund performance
• Underlying portfolio companies
• Revenue and profitability trends
• Remaining capital commitments
• Fund strategy and investment period
• Previous distributions
• Expected exit opportunities
• Fund manager experience
• Transaction structure
• Legal and regulatory considerations

Moreover, investors should understand that historical performance does not guarantee future results. Each transaction has its own characteristics, risks, and expected return profile.

Valuation and Pricing

Pricing is another important element of a secondary transaction.

In practice, the price paid for a private equity interest may differ from its reported NAV. A discount may reflect factors such as the remaining investment period, market conditions, asset concentration, liquidity considerations, or uncertainty around future valuations.

Conversely, a buyer may be willing to pay a premium when the underlying assets are considered particularly attractive.

For this reason, investors should evaluate the relationship between purchase price, underlying asset value, expected cash flows, and potential returns rather than focusing on the headline discount or premium alone.

Investment Horizon and Liquidity

Private market investments are generally less liquid than publicly traded securities.

Consequently, investors should consider how long their capital may remain invested and whether the investment fits their broader portfolio strategy.

A secondary transaction can sometimes provide a different maturity profile from a primary commitment. Nevertheless, investors should not assume that they will be able to sell their secondary investment whenever they choose.

Ultimately, the appropriate investment horizon depends on the underlying assets, transaction structure, market conditions, and investor objectives.

Who Can Invest in Private Equity Secondaries?

Access to private markets depends on the investment structure, jurisdiction, investor classification, and applicable regulatory requirements.

Generally, opportunities may be available to institutional investors, family offices, sophisticated investors, and other qualified or accredited investors who meet the relevant requirements.

However, eligibility requirements can vary significantly between jurisdictions and individual investment opportunities.

For this reason, investors should review the applicable requirements and documentation before considering a transaction.

At Mirai Capital, the focus is on connecting qualified investors with carefully selected private market opportunities through an established investment network.

How Mirai Capital Provides Access to Private Market Opportunities

Investors need strong networks, established relationships, and transaction expertise to access attractive private market investments.

Therefore, Mirai Capital focuses on connecting qualified investors with selected private equity secondary opportunities, pre-IPO investments, and other institutional-quality private market transactions.

In addition, our approach is designed around access, evaluation, and investment execution rather than simply presenting investors with a list of opportunities.

Each opportunity requires its own assessment. As a result, investors can evaluate potential investments based on the underlying company or fund, transaction structure, valuation, investment horizon, and relevant risk factors.

Mirai Capital’s network provides access to opportunities that may not be readily available through traditional public markets.

If you are looking to explore private market investment opportunities, you can learn more about the opportunities available through Mirai Capital.

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Final Thoughts

Private equity secondaries have become an important component of the broader private markets ecosystem. By providing a mechanism for existing investors to obtain liquidity and new investors to acquire existing interests, the secondary market creates additional flexibility for private equity participants.

At the same time, secondary investments require careful evaluation. Investors should examine the underlying assets, transaction structure, valuation, investment horizon, liquidity considerations, and potential risks before making an investment decision.

Ultimately, understanding how private equity secondaries work is an important first step for investors considering opportunities beyond traditional public markets.

Mirai Capital connects qualified investors with selected private market investment opportunities, including private equity secondaries and pre-IPO investments.

Explore the opportunities available through Mirai Capital.