The definitions and acronyms are at the end of the article

Exploring the evolution, challenges, and opportunities in LP-led secondaries

A snapshot of the growing secondary market

The secondary market has transitioned from a niche solution to a cornerstone of modern private markets, revolutionizing how investors achieve liquidity and manage portfolios. It has become indispensable, evolving into a versatile toolbox addressing the challenges of a traditionally illiquid sector. Over the past decade, it has undergone profound structural changes, now encompassing a diverse array of transaction types across numerous sectors, including SACV, MACV, Buyout, Infrastructure, Private Credit, and VC/Growth.

The growth of the sector today is not only reflected in the diversity of transactions but is also quantifiable, with record transaction volumes in H1 2024 reaching c.$70bn, representing a growth of around 70% year-over-year, primarily dominated by buyout transactions. With a record-breaking year anticipated for FY24 and $150bn in expected transaction volume, the secondary market has never seen such high demand, not only from traditional investors but also from new entrants.

The main types of secondary transactions

As highlighted in the previous section, the market today provides buyers with a diverse range of transaction types across various sectors. However, two primary categories of operations emerge, defined by the stakeholders involved.

GP-led transactions

GP-led secondaries are transactions initiated by a General Partner (GP) and now represent a significant segment of the private capital secondaries market, accounting for c.40% of its volume. These transactions primarily serve GPs by increasing the Distribution Paid-In (DPI), providing liquidity to Limited Partners (LPs), and thereby enhancing the credibility of their funds to facilitate raising new capital in the future.

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Example of transactions

  1. Continuation funds: These transactions involve transferring some or all of a fund’s existing assets into a newly created vehicle, which remains under the management of the original GP. The new vehicle is funded by incoming buyers and rolling LPs who wish to maintain their investment.
  2. Buyout of third-party investors: The sponsor establishes a new Special Purpose Vehicle (SPV) to acquire additional ownership in a portfolio company, purchasing stakes from third-party investors. </aside>

LP-led transactions

LP-led secondary transactions occur when private capital investors sell their fund interests to other investors. Historically dominated by secondary funds, this market is now attracting a broader range of new participants. Liquidity pressures, coupled with a favorable portfolio valuation environment in H1 2024, have driven a growing number of LPs—both repeat and first-time sellers—to engage in these transactions with greater frequency.

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Example of transactions

  1. Direct LP-led: In this type of transaction, purchasing investors replace the original Limited Partners (LPs) in the funds and assume their obligations, effectively stepping into their positions.
  2. Fund of funds SPV: The Fund of Funds (FoF) sponsor sells LP stakes held by their existing fund(s) to a newly created Special Purpose Vehicle (SPV). This SPV is financed by new investors, who determine the price and terms of the transaction. </aside>

Both LP-led and GP-led transaction structures will continue to evolve as sponsors and institutions innovate to address the changing needs of their capital partners

LP-led focus

As outlined in the introduction, LP-led transactions involve structuring deals that allow Limited Partners (LPs) to gain liquidity on their stakes in funds or fund of funds. An increasing number and frequency of LPs entering the market have driven transaction volumes to a half-year record. Today, LP-led transactions account for nearly $41bn (compared to $11bn in 2020), representing more than 50% of total transaction volume.