Key Takeaways
- • Traditional secondaries occur when a Limited Partner sells its stake in one or more private market funds, typically at a discount to the fund's net asset value (NAV), with the buyer assuming the remaining returns and any unfunded capital commitments.
- • Portfolio rebalancing is one of the most common motivations, triggered when public market declines, stronger-than-expected private returns, or slower distributions push a portfolio away from target allocations.
- • Non-traditional secondaries take two main forms: continuation vehicles (GP-led secondaries) and portfolio finance, which provides liquidity without an outright sale.
- • Continuation vehicles let managers keep high-conviction assets while giving existing investors the choice to sell for cash or roll into the new vehicle.
- • Portfolio finance typically involves a loan secured against an LP's fund stake or a GP's fund assets, repaid from future distributions.
Summary
Goldman Sachs Asset Management explains that traditional secondaries arise when a Limited Partner (LP), the investor in a private market fund that supplies most of the capital but does not select or manage the underlying assets, decides to sell its stake in one or more funds. The LP typically turns to the secondary market and usually sells at a discount to the fund's estimated net asset value (NAV). The buyer steps into the LP's position, receiving all remaining returns and assuming any unfulfilled capital commitments the original investor had made to the fund.
According to the firm, the most common reason for selling is portfolio rebalancing. If public markets fall, private investments outperform expectations, or distributions from private market funds arrive more slowly than anticipated, an investor's allocations may drift from targets. Selling existing stakes can free up capital for new investments and restore the intended allocation. Investors also sell to shift priorities, such as reducing exposure to a particular strategy, geography, industry or manager, simplifying an overly large or complex portfolio, or responding to regulatory changes, capital needs or broader business goals. The secondary market allows these adjustments to occur more quickly.
Non-traditional secondaries generally take two forms. Continuation vehicles, also called GP-led secondaries, are created when a fund manager believes an investment can still generate further value but investors are seeking liquidity. Instead of selling to a third party, the manager transfers the asset into a new fund. Existing investors can then sell and receive cash or remain invested and participate in future growth. Goldman Sachs Asset Management illustrates this with a private equity manager that owns a well-performing medical device company with further growth potential through market expansion or new products.
Portfolio finance provides liquidity without an outright sale, typically through a loan secured against an investor's stake in a fund portfolio or against the assets of a fund for a manager. The investor repays the loan from distributions as the fund sells investments. The firm notes such transactions can offer more flexibility than traditional financing because they are often customized to an investor's objectives, allowing investors to retain exposure to assets they still favor while meeting near-term cash needs.
According to the firm, the most common reason for selling is portfolio rebalancing. If public markets fall, private investments outperform expectations, or distributions from private market funds arrive more slowly than anticipated, an investor's allocations may drift from targets. Selling existing stakes can free up capital for new investments and restore the intended allocation. Investors also sell to shift priorities, such as reducing exposure to a particular strategy, geography, industry or manager, simplifying an overly large or complex portfolio, or responding to regulatory changes, capital needs or broader business goals. The secondary market allows these adjustments to occur more quickly.
Non-traditional secondaries generally take two forms. Continuation vehicles, also called GP-led secondaries, are created when a fund manager believes an investment can still generate further value but investors are seeking liquidity. Instead of selling to a third party, the manager transfers the asset into a new fund. Existing investors can then sell and receive cash or remain invested and participate in future growth. Goldman Sachs Asset Management illustrates this with a private equity manager that owns a well-performing medical device company with further growth potential through market expansion or new products.
Portfolio finance provides liquidity without an outright sale, typically through a loan secured against an investor's stake in a fund portfolio or against the assets of a fund for a manager. The investor repays the loan from distributions as the fund sells investments. The firm notes such transactions can offer more flexibility than traditional financing because they are often customized to an investor's objectives, allowing investors to retain exposure to assets they still favor while meeting near-term cash needs.
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