Private equity funds are structured as limited partnership, with general partner managing the fund’s investments and the limited partners providing most, if not all, of the capital. Limited partners hold limited partnership interests in the fund. The secondary market (secondaries) in private equity involves the buying and selling of these limited partnership interests. Investors may decide to sell their stakes in a private equity fund for various reasons, such as the need for liquidity, changes in investment strategy, or portfolio rebalancing. Other aspects of secondaries follow:
- Buyers: Secondary transactions can involve a variety of buyers, including other institutional investors, dedicated secondary funds, or even the fund’s existing limited partners. These buyers acquire the existing commitments for the selling limited partners.
- Secondary Funds: Some specialized investment funds, known as secondary funds or secondaries funds, focus exclusively on buying existing limited partnership interests in private equity funds. These funds play a crucial role in the secondary market by providing liquidity to investors looking to exit their private equity positions.
- Pricing: The pricing of secondary transactions is influenced by various factors, including the net asset value (NAV) of the underlying investments, the fund’s performance, the remaining unfunded commitments, and prevailing market conditions.
- Benefits: Secondaries provide liquidity to investors who want to exit their investments before the natural expiration of a private equity fund. They also allow new investors to gain exposure to established private equity portfolios without having to wait for fund’s cycle of fundraising.