Sunday 10th August 2025
PE primary versus secondaries: Mechanics, trade-offs and portfolio applications
Private equity (PE) offers attractive return potential, diversification, and access to company-level growth not captured in public markets. However, the traditional structure of primary PE funds introduces challenges such as long capital deployment timelines, limited liquidity, and significant blind pool risk. Enter the secondaries solution.
Secondaries (secondary investments) are a growing subset of the private equity asset class (and private credit) that offer an alternative path to private markets exposure. This piece outlines what secondaries are, how they differ from primary PE investments – which are investments in a newly opened fund – and the nuanced trade-offs involved in allocating to each.
What are secondaries?
Secondaries involve the acquisition of existing positions/units in private-market funds or portfolios. Instead of committing capital to a newly raised fund, the secondary investor buys an interest already partially or fully invested. These transactions allow existing investors (typically, the Limited Partners, or ‘LPs’) to exit early, while giving secondary buyers access to known assets.
Types of Secondary Transactions
- LP-led secondaries: One or more investors sell their existing fund interests.
- GP-led secondaries: The fund manager (the General Partner, or GP) arranges a restructuring (for example, a ‘continuation vehicle’) into which the ‘star’ investment (or investments) is rolled, giving liquidity to those who want it, while retaining the upside for those investors who want to extend the ride.
- Direct secondaries: Sale of ownership in private companies by founders, employees, or early-stage investors, often facilitated by a secondaries specialist.
Comparing Secondaries to Primary Private Equity
| Primary PE | Secondaries | |
| Capital deployment | Drawdowns over three to five years | Rapid deployment, often within months |
| J-curve effect | Deep negative early internal rates of return (IRRs) | Significantly reduced or inverted |
| Visibility | ‘Blind pool’, risk: investors in primary funds don’t know, at the time they invest, what the fund will invest in | High transparency on assets |
| Liquidity | 10-to-12-year fund life | Shorter duration, often five to eight years or even ‘evergreen’ |
| Pricing | Commitments at par | Discounts to net asset value (NAV) based on market conditions |
| Return profile | Higher gross IRRs with long tail | Lower gross IRRs but improved distributed-to-paid-in capital (DPI) – a term used to measure the total capital that a private equity fund has returned to its investors so far – and shorter cash cycles |
| Access | May be restricted to existing LPs | Access to top-tier funds post-launch |
| Vintage exposure | Single vintage, less time diversification | Multi-vintage exposure from mature portfolios |
Why Secondaries Appeal to Allocators
1. Reduced J-curve risk
Secondaries mitigate the steep negative IRRs seen in the early years of primary PE investments, because buyers are purchasing partially or fully funded positions with assets already marked to fair value. This improves early cashflow dynamics and IRR metrics.
2. Faster capital deployment
Investors gain quicker exposure to private-equity beta. This is particularly important in environments where large allocations must be made efficiently without overcommitting.
3. Price inefficiencies and discounts
Secondary funds play a critical role in private markets by providing liquidity to LPs who want or need to exit their commitments before a fund’s natural maturity. These sellers may be facing portfolio rebalancing pressures, regulatory constraints, or cashflow requirements, prompting them to accept a discount to the latest reported NAV in exchange for immediate liquidity.
This dynamic allows the secondary buyer to acquire high-quality assets at a discount, often ranging from 5 per cent–30 per cent, depending on market conditions, asset quality, and urgency of the seller. Crucially, this discount is typically recognised immediately as an unrealised gain upon purchase. Unlike primary private equity, where value creation occurs over time through operational improvements and exits, the secondary buyer locks-in an element of return upfront, simply by transacting below fair value.
4. Smoother DPI and shorter duration
With underlying assets closer to exit, secondaries can return capital faster. This appeals to investors managing medium-term liabilities or seeking more predictable cashflows.
5. Vintage diversification
Secondaries offer exposure to multiple vintages and funds, improving time diversification and reducing concentration risk related to economic or fundraising cycles.
The Risks and Trade-offs
1. Adverse selection
Sellers may be exiting due to poor expected performance. Buyers must conduct deep due diligence to avoid inheriting underperforming portfolios.
2. Stale NAV risk
PE fund valuations lag public markets. Buying into funds at a discount may not protect buyers if NAVs are subsequently revised downward.
3. Reduced upside potential
Because assets are often partially or fully mature, the most explosive growth phase may be behind them. Secondaries may sacrifice some upside for greater certainty and shorter duration.
4. Complexity in GP-led deals
Continuation vehicles and fund restructurings may involve conflicts of interest, valuation challenges, and layered fee structures. Manager alignment is critical.
Conclusion
Secondaries provide an alternative path into private equity with a distinct return profile. They improve liquidity characteristics, reduce blind pool risk, and allow for opportunistic discount capture. However, they also demand deep due diligence, strong underwriting skills, and an understanding of the structural risks inherent in less-liquid and more complex transactions. Used thoughtfully, secondaries are not a replacement for primaries, in our view, but a strategic complement that improves the overall robustness of private-market portfolios.
Nick is a columnist for The Inside Adviser and an expert on research and portfolio construction.
