Secondaries and Co-Investments

Secondary Market and Co-Investments

The development of the secondary market and the growth of co-investment opportunities have significantly changed the landscape of PE investing, providing LPs with additional tools for portfolio management and enhancing returns.

Secondary Market: Overview

PE secondaries involve the acquisition of existing LP positions in PE funds on the secondary market. The market volume has grown from $25 billion in 2012 to over $130 billion in 2023.

Types of Secondary Transactions

Type	Description	Market Share	Typical Discount
LP-led (Traditional)	LP sells their stake in a fund	~40%	5–15% to NAV
GP-led / Continuation	GP creates a new vehicle for the best assets	~50%	0–5% to NAV
Direct Secondaries	Purchase of a stake in a specific portfolio company	~10%	Varies

LP-Led Secondaries

Seller motivations (LPs):

Portfolio rebalancing: Reducing overweight to PE
Liquidity needs: Regulatory requirements, redemptions
Manager relationships: Exiting underperforming GPs
Strategic shifts: Changing investment strategy
NAV management: For insurance companies, pension funds

Pricing of LP Secondaries

Factor	Premium	Discount
Fund quality (quartile)	Top quartile: +5–10%	Bottom quartile: -20–30%
Fund age	Mature (year 7+): +5%	Young (year 2–3): -5–10%
Unfunded %	Low unfunded: +5%	High unfunded: -10–15%
GP reputation	Tier 1 GP: +5%	Emerging GP: -5–10%
Market conditions	Risk-on: +5%	Risk-off: -10–20%

GP-Led Secondaries (Continuation Vehicles)

A continuation vehicle (CV) is a mechanism that allows the GP to continue holding the best assets:

Deal structure:
- The GP allocates one or more assets from the existing fund
- A new vehicle is created with new capital and fresh economics
- Existing LPs choose: roll-over or cash exit
- Secondary buyers provide liquidity

Advantages for Participants:

Participant	Benefit
GP	Continued value creation, crystallization of carry, reset economics
Existing LPs (roll)	Continued exposure to quality asset, potential upside
Existing LPs (exit)	Liquidity, DPI acceleration, portfolio rebalancing
Secondary Buyers	Access to quality assets, shorter J-curve, known asset

Due Diligence Concerns:

Pricing fairness: Independent valuation is mandatory
GP conflicts: Alignment of GP vs LP interests
Asset quality: Why does the GP want to hold longer?
New terms: Management fee, carry economics

Co-Investments

A co-investment is a direct investment by an LP alongside the GP in a specific deal, usually without a management fee and carry (or with reduced economics).

Co-Investment Economics

Structure	Management Fee	Carried Interest	IRR Impact
Fund investment	2.0%	20%	Base case
Co-investment (no fee/carry)	0%	0%	+400–600 bps
Co-investment (reduced)	0.5–1.0%	10%	+200–400 bps

Advantages of Co-Investments

Fee savings: Significant reduction in cost drag
Increased exposure: More capital to the best GPs
Deal selection: Ability to choose specific deals
Transparency: In-depth understanding of specific assets
Relationship building: Strengthening the relationship with the GP

Risks and Challenges

Adverse selection: GP offers deals where capital is needed
Execution speed: Tight timelines (2–4 weeks)
Limited DD: Less time for analysis
Concentration risk: Single-asset exposure
Governance: Limited rights compared to fund investment
J-curve amplification: No diversification benefit

Portfolio Construction with Secondaries and Co-Investments

Optimal allocation (for large LPs):

Strategy	Share of PE Allocation	Characteristics
Primary Fund Commitments	50–60%	Core relationships, vintage diversification
Secondary Purchases	20–30%	J-curve mitigation, tactical opportunities
Co-Investments	15–25%	Fee savings, return enhancement

J-Curve Mitigation via Secondaries

Purchasing mature fund interests smooths the J-curve:

Vintage Age	Typical IRR Profile	Capital Call Expectation
Year 1–2	Negative (J-curve)	High (60–80% drawn)
Year 3–4	Turning positive	Medium (80–100% drawn)
Year 5–7	Stable positive	Low, distributions starting
Year 8+	Distribution phase	Minimal, cash returning

Due Diligence for Secondary Purchases

Checklist for LP-led Secondaries:

Area	Questions
Portfolio Analysis	NAV breakdown by companies, last marks, GP commentary
GP Quality	Track record, team stability, strategy consistency
Fund Terms	Remaining unfunded, fee structure, key terms
Exit Visibility	Pipeline, expected holding period remaining
Pricing	Fair value vs bid, market comparables
Legal	Transfer restrictions, GP consent, ROFR

Checklist for GP-led/Continuation:

Independent valuation report
Rationale for continuation vs exit
New GP economics and alignment
LPAC approval and process fairness
Roll-over options for existing LPs
New value creation plan

Trends in the Secondary Market

GP-led dominance: More than 50% of market volume
NAV lending: Financing against PE portfolios
Preferred equity: Structured solutions for liquidity
Single-asset deals: Focus on trophy assets
Democratization: Access for smaller LPs through funds
Technology: Platforms for smaller transactions

Key Secondary Fund Managers

Manager	AUM ($B)	Strategy Focus
Ardian	$50+	Diversified secondaries
Lexington Partners	$55+	LP-led specialist
Coller Capital	$35+	Global secondaries
Partners Group	$45+	Direct + Secondaries
HarbourVest	$40+	FoF + Secondaries
Blackstone Strategic Partners	$40+	GP-led focus

Recommendations for Investors

Build internal capability: Co-investment requires dedicated resources
Start with trusted GPs: Co-invest with managers you know well
Diversify secondary vintage: Do not concentrate in one period
Watch for conflicts: Especially in GP-led transactions
Model scenarios: Stress-test assumptions in DD
Negotiate rights: Information, governance, exit provisions