Our Insight
Demystifying Secondary Transactions in Private Funds
Summary: Explains the mechanics and risks of LP interest transfers in private funds. Includes tips for documentation, valuation, and consent negotiation.
Content
Secondary transactions have evolved from niche liquidity solutions into a dynamic segment of the private fund ecosystem. Whether initiated by Limited Partners (LPs) seeking early exits or General Partners (GPs) restructuring fund exposure, these deals offer flexibility—but also legal complexity. At Shirley Choi & Co., we’ve advised on secondary transfers across Hong Kong, Cayman, and BVI structures. Here’s what sponsors and investors need to know.’
What Are Secondary Transactions?
A secondary transaction involves the transfer of an existing interest in a private investment fund from one investor to another. Unlike primary fundraising, secondaries allow new investors to enter mature funds—often with greater visibility into portfolio performance.
There are two main types:
- LP-led secondaries: An LP sells its interest in a fund to a third party.
- GP-led secondaries: The GP initiates a transaction, often rolling assets into a continuation vehicle and offering existing LPs a liquidity option.
Why They Matter
- Liquidity: LPs can exit illiquid positions before the fund’s natural term ends.
- Portfolio Rebalancing: Investors can reallocate capital based on strategy or market conditions.
- Transparency: Buyers gain a “free look” at the fund’s assets, avoiding blind-pool risk.
- Discounted Entry: Interests may be acquired below NAV, offering potential upside.
Legal & Documentation Considerations
| Issue | Key Questions to Address |
|---|---|
| Transfer Restrictions | Does the LPA require GP or investor consent? |
| Valuation Mechanics | Is pricing based on NAV, third-party appraisal, or negotiation? |
| Side Letter Terms | Are any rights non-transferable or LP-specific? |
| Regulatory Compliance | Are there licensing or disclosure obligations triggered? |
Sponsors must review fund documentation carefully. Many LPAs restrict transfers or require GP approval. Side letters may contain bespoke terms that don’t carry over to new investors.
Best Practices for Sponsors & Buyers
- Due Diligence: Review fund performance, asset composition, and legal terms.
- Clear Consent Process: Engage the GP early to streamline approvals.
- Tax & Regulatory Review: Consider implications in both home and fund jurisdictions.
- Document Everything: Use robust transfer agreements and update fund records promptly.
Market Trends
- GP-led secondaries now account for nearly half of all secondary volume.
- Continuation vehicles are increasingly used to retain high-performing assets.
- Secondary market volume reached US$134 billion in 2021, reflecting growing demand.
Final Thought
Secondary transactions offer flexibility—but they are not plug-and-play. Sponsors and investors must navigate legal, operational, and strategic layers to ensure smooth execution. At Shirley Choi & Co., we help clients unlock liquidity and opportunity through well-structured secondary deals.