"The Pulse" -- #151 / How Secondaries Work

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Market Update:

How Secondaries Work

You've probably heard "secondaries" come up more often lately, and there's a reason. The market just had its biggest year on record and it's genuinely changing how private equity works under the hood.

Start with the basic structure of a PE fund, because the whole secondaries story flows from how these things are built. When a GP raises a fund, limited partners (pensions, endowments, sovereign wealth funds) commit capital for roughly ten years. The GP calls that capital to buy companies, spends a few years trying to make them more valuable, and then sells them off in the back half of the fund's life to generate distributions.

Secondaries are what emerges when that timeline breaks down, either because the LP needs liquidity early or because the GP wants to hold an asset longer than the fund allows.

Two main flavors to understand. LP-led is the simpler case, where an LP sells its stake in a fund to a secondary buyer who steps into its shoes, taking on the remaining commitment and receiving future distributions. These transact at some discount to NAV because the buyer needs compensation for illiquidity.

GP-led is more intricate. The sponsor identifies portfolio companies it wants to keep owning past the fund's life and sets up a new vehicle (a continuation fund) to hold those assets. Existing LPs choose between cashing out at the agreed price or rolling their exposure into the new vehicle, and secondary buyers provide the fresh capital that funds the cash-out option.

The scale here has gotten genuinely serious. Volume hit $226 billion in 2025 according to Evercore, up 41% from the prior record, with LP-led at $120 billion and GP-led at $106 billion. The entire market was $26 billion in 2013, so this has nearly 9x'd in just over a decade.

What's driving it is a combination of a broken exit environment and a shift in how GPs think about their best assets. The IPO window has been mostly shut and strategic M&A is still soft, which has stretched average hold periods past six years. LPs that expected distributions are sitting on paper gains with no actual cash coming back, so the LP-led market has become a release valve.

On the GP side, the logic has flipped on top-performing companies. If you own a business compounding at 25% a year, dumping it because your fund clock ran out feels like leaving money on the table.

Pricing tells you how competitive this has become. Buyout funds traded at 94% of NAV in the first half of 2025, essentially par, up from sub-90% in 2022. The old stereotype of secondaries as a bargain-hunting strategy where you pick up stakes at 70 cents on the dollar is mostly dead. Dedicated secondary capital hit roughly $302 billion by mid-2025, and too much money is chasing a finite number of attractive stakes.

The continuation vehicle piece is where the most interesting debate in private markets is happening. The structural issue is that the GP is on both sides of the trade, selling an asset out of a fund they manage into a new vehicle they also manage, setting the transfer price themselves. Fairness opinions are standard and LPs get the choice to cash out or roll.

But the skeptical read is hard to shake. If the asset is really as good as the GP claims, why isn't a strategic buyer paying more in a competitive auction?

Sometimes the honest answer is the GP has genuine conviction the market is mispricing the company. Sometimes the less flattering answer is that selling at current prices would force an uncomfortable markdown, and the continuation vehicle keeps the asset on the books at a favorable valuation while generating more fees. Both happen regularly, which is why sophisticated LPs have gotten much more rigorous about how they evaluate these processes.

The takeaway is that secondaries have gone from a niche corner of private markets where people offloaded mistakes into a core piece of how the industry generates liquidity. If primary PE is about buying companies, the secondary market is increasingly how ownership of those companies gets traded between investors, and it's where actual cash distributions come from when traditional exits aren't cooperating.

This all relates to the general idea that companies are staying private for longer. The traditional pipeline of raising a few rounds in the private markets, selling out to PE, and then getting taken public is much smaller than it was in prior decades. Therefore, IPOs are more concentrated towards the largest private companies which are still dependent on financing. On the flip side, this has been a selling point for private markets institutions targeting retail capital—essentially saying: “We have the access to the companies you want to get in. You need us to get you in.”

Now, the big prediction markets such as Kalshi and Polymarket are creating a side-door by writing futures contracts around certain events related to these large, private companies.

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Disclosure: Nothing written here is financial advice or should be used for investment decisions.

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