Private Market Glossary

What does private equity secondaries mean?

Private equity secondaries typically refer to private equity transactions where initial investors, i.e., limited partners (LPs), sell their stakes in private equity funds to other investors. Secondaries stand in contrast to the standard lifecycle of a private equity fund, where an investor/LP initially invests into the fund and then, after, say, 10 years, the fund might close/wind down and investors are cashed out. With secondaries, LPs can essentially sell their stakes early.

Secondaries definition - Forge

A better understanding of secondaries

While secondaries often refer to LPs selling their stakes in private equity funds, a general partner (GP) of a private equity fund can perform what is known as a GP-led secondary.

In many GP-led secondaries, a private equity fund would carry over some investments from one fund to a new one, thereby giving LPs the option to either roll their investments over to the new fund or exit. Meanwhile, new investors can enter. In contrast, LP-led secondaries involve investors/LPs in the private equity fund being the ones to initiate the transaction.

Secondary funds can provide diversification, as secondary funds could buy stakes in different private equity funds by taking over stakes of LPs in various funds.

Note that the private equity secondary market generally refers to these secondary transactions where investments in private equity funds change hands. This is different from what is referred to as a secondary market; a secondary market refers to buying and selling existing individual securities, like the private stock in a particular startup, as opposed to shares of a private equity fund.

What role do secondaries play in the private market?

Secondaries help bring liquidity and flexibility to the private market, which can add strength to the overall market. If LPs had no choice but to wait for a private equity fund to close/wind down and return their money, they might be less inclined to invest in alternative asset funds. But knowing that a secondary market exists, an investor might be more willing to invest in private equity or venture capital fund. It can also be good for private market companies looking to attract investors.

If a startup is conducting a fundraising round, it might attract interest from private equity and venture capital funds. If these funds potentially have more capital by virtue of LPs being more comfortable investing, knowing they potentially have the liquidity and flexibility of the secondary market, then that could ultimately help the startup attract more capital. To be sure, however, there is no guarantee that an LP/investor will be able to participate in a secondary transaction of its stake in a given fund, either because a market for such stake may not exist or because the fund itself may have the right to block this type of transaction.

Frequently asked questions about secondaries 

What is the difference between private equity primaries and secondaries?

Private equity primaries are the initial issuance of private equity fund shares to investors. Secondaries refer to the subsequent transfer of the shares, such as when an investor buys out an LP’s stake in a private equity fund.

What is the difference between secondaries and funds of funds?

Secondaries specifically refer to investments in secondary transactions, such as where investors take over existing stakes in private equity funds. A fund of funds refers to the fund itself investing in different private equity funds, such that the fund of funds becomes an LP of the other fund.

About the Author

Jake Safane specializes in financial reporting and is a former thought leadership editor for The Economist with articles appearing in Business Insider and The Washington Post among other media outlets. Mr. Safane has received compensation from Forge Global, Inc. for authoring this article. Read more from Jake.

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