LP-Led Secondary

What the buyer takes over

The buyer is substituted for the seller as a limited partner. It acquires the seller's capital account, valued at its share of the fund's net asset value, the obligation to fund the remaining unfunded commitment, and the seller's rights and obligations under the limited partnership agreement (LPA). Some things do not move automatically. Side-letter rights are often personal to the original investor and pass only if the side letter or the GP allows. Liability to return distributions the seller received before closing (an LP giveback) is allocated between the parties by the purchase agreement, within what the LPA permits. The fund's portfolio, terms and manager are unchanged.

Forms of LP-led sale

• Single-fund sale: one interest, often negotiated with a small number of buyers.
• Portfolio sale: many interests sold together, usually through an auction run by an adviser. Buyers may bid for the whole portfolio or for sub-pools, and the seller may accept different buyers for different funds.
• Strip sale: a pro rata slice of many interests, so the seller keeps part of the upside of each.
• Tail-end sale: interests in late-life funds with small residual NAV.
• Structured sale: deferred payment, buyer-side financing or preferred equity used to bridge a gap between bid and ask.

The process

1. Preparation. The seller compiles a dataset for bidders, often called the tape: for each interest the commitment, reported NAV at the reference date, unfunded amount and cash flows since. Many LPAs restrict disclosure of fund information, so the seller may need GP consent or confidentiality undertakings from bidders before sharing reports.
2. Bidding. Buyers underwrite fund by fund and often company by company, then submit indicative and later binding bids, each expressed as a percentage of reference-date NAV.
3. Signing. Buyer and seller sign a purchase and sale agreement covering price, the NAV reference date, adjustments for later calls and distributions, payment timing, representations and closing conditions.
4. Transfer. The GP reviews the buyer (investor eligibility, KYC/AML and regulatory checks), runs any right of first refusal or pre-emption period the LPA grants to the GP or to other LPs, and gives or withholds consent. Seller, buyer and GP sign transfer documents, typically a transfer or assignment and assumption agreement, and the GP records the buyer as a limited partner.
5. Closing. The buyer pays the adjusted price. Portfolio sales often close fund by fund as consents arrive.

GP consent and transfer restrictions

LPAs commonly prohibit transfers without the GP's consent. How much discretion the GP has depends on the drafting: many LPAs let the GP withhold consent in its sole discretion, others require that consent not be unreasonably withheld, and transfers to an LP's affiliates are often permitted on lighter terms. Whether a GP can block a particular sale is a question about the specific LPA and side letters, not a general rule (see transfer of LP interests).

Some restrictions protect the fund's legal status. A US fund relying on section 3(c)(7) of the Investment Company Act must be owned exclusively by persons who were qualified purchasers when they acquired their interests, so the buyer must qualify; a fund relying on section 3(c)(1) must stay within its limit of 100 beneficial owners (250 for a qualifying venture capital fund). A fund that keeps benefit plan investors below 25% of the value of any class of equity interests, to avoid plan-asset status under the US plan asset regulation, checks each buyer's ERISA status on every transfer. LPAs also commonly let the GP refuse transfers that could cause the fund to be treated as a publicly traded partnership for US tax purposes.

Pricing

Each interest is priced as a percentage of its NAV at the reference date. Calls the seller funds after that date are added to the price and distributions it receives are deducted, usually dollar for dollar, and the buyer separately assumes the unfunded commitment. A bid reflects the buyer's forecast of the interest's future distributions and calls, discounted at its target return, so it moves with asset quality, fund age and remaining life, the GP, fees and carry still payable, fund-level borrowing, concentration and market conditions. A deferred payment raises the headline price but lowers its present value. Mechanics and worked examples are in secondary pricing.

Tax treatment (US)

Two US tax issues often arise when an interest in a partnership engaged in a US trade or business changes hands. First, under Internal Revenue Code (IRC) section 1446(f), when a foreign seller disposes of a partnership interest and any part of the gain would be treated as effectively connected income under section 864(c)(8), the buyer must withhold 10% of the amount realised unless an exception applies. The Treasury regulations list the exceptions, among them a certification by the seller that it is not a foreign person or that the transfer will not produce a realised gain, and a certification by the partnership that less than 10% of its net gain would be effectively connected (26 CFR 1.1446(f)-2(b)(2)-(4)). Second, under IRC section 7704 a partnership whose interests are traded on an established securities market, or are readily tradable on a secondary market or its substantial equivalent, is a publicly traded partnership and is taxed as a corporation unless it meets the exception in section 7704(c), which generally requires 90% or more of its gross income for the year to be qualifying income. That rule is why many LPAs limit the number and timing of transfers. How both rules apply depends on the specific fund and parties.

Why LPs sell

Common reasons are raising liquidity; rebalancing after the denominator effect pushes private assets above target; reducing the number of GP relationships; exiting tail-end funds whose monitoring cost exceeds their remaining value; and changes of strategy, regulation or ownership. Many LP-led sales are portfolio-management decisions rather than distress, but a buyer still has to ask what the seller knows that it does not.

Not the same as

• GP-Led Secondary: In a GP-led secondary the manager initiates a restructuring of the fund's assets or investor base; in an LP-led secondary one investor sells its own interest and the fund is unchanged.
• Direct Secondary: A direct secondary sells shares in an operating company, not an interest in a fund.
• Transfer of LP Interests: Transfer of LP interests is the legal mechanism and the LPA provisions that govern it; an LP-led secondary is the commercial transaction that uses that mechanism.

How it is classified

• LP-led if the holder of the interest initiates the sale and the fund's assets, terms and manager are unchanged.
• A process in which the GP arranges a buyer to make the same offer to all LPs (a tender offer) is GP-led, even though each LP sells its own interest.
• A sale of fund interests by a fund of funds or secondary fund is still LP-led; the seller's own type does not change the classification.

Common mistakes

• Assuming the GP must approve any transfer that meets objective criteria. Many LPAs let the GP withhold consent in its sole discretion; others require consent not to be unreasonably withheld. The answer is in the LPA and side letters.
• Treating the quoted price as a percentage of current NAV. It is a percentage of reference-date NAV, adjusted for later cash flows.
• Comparing bids without accounting for the unfunded commitment each buyer will assume.
• Assuming side-letter rights travel with the interest.
• Sharing fund reports with bidders without checking the LPA's confidentiality provisions.
• Reading every LP-led sale as a distress signal.

Edge cases

• Where the LPA grants a right of first refusal to the GP or to other LPs, the holder can take the interest at the agreed price, so the winning bidder can lose the deal after signing.
• A sale of part of an interest requires the GP to split the commitment and may run into minimum holding sizes in the LPA.
• Interests held through feeder or parallel vehicles may need consents at more than one level.
• Under some LPAs a change of control of the LP itself, for example the sale of a fund of funds' manager, counts as a transfer requiring consent.

Questions

Sources

1. 15 U.S.C. 80a-3 - Definition of investment company (Investment Company Act sec. 3, incl. 3(c)(1) and 3(c)(7)). U.S. Congress (United States Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 3(c)(1) (100 persons; 250 for a qualifying venture capital fund) and 3(c)(7)(A) — supports: 3(c)(1) beneficial-owner limit (100; 250 for a qualifying venture capital fund); 3(c)(7) ownership exclusively by persons who were qualified purchasers at acquisition
2. 29 CFR 2510.3-101 - Definition of "plan assets" - plan investments (plan asset regulation). U.S. Department of Labor, Employee Benefits Security Administration (CFR text via eCFR; LII mirror), eCFR current as of 2026-09-29; no amendment since eCFR baseline. Status: in force (checked 2026-10-01). 29 CFR 2510.3-101(f)(1) — supports: Benefit plan investor participation is significant if 25% or more of the value of any class of equity interests is held by benefit plan investors
3. 26 U.S.C. 1446 - Withholding of tax on foreign partners' share of effectively connected income (incl. 1446(f)). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 1446(f)(1) — supports: 10% transferee withholding on dispositions of partnership interests by foreign sellers
4. 26 U.S.C. 864 - Definitions and special rules (trade or business within the US; effectively connected income). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 864(c)(8)(A)-(B) — supports: A foreign person's gain on disposal of an interest in a partnership engaged in a US trade or business is treated as effectively connected to the extent of its share of the partnership's effectively connected gain on a deemed sale
5. 26 CFR 1.1446(f)-2 - Withholding on the transfer of a non-publicly traded partnership interest. Internal Revenue Service / Treasury (CFR text via LII), Current CFR text as published by LII (accessed 2026-10-01); T.D. 9926, 85 FR 76935, Nov. 30, 2020. Status: in force (checked 2026-10-01). 26 CFR 1.1446(f)-2(a); (b)(2) (non-foreign status), (b)(3) (no realized gain), (b)(4) (partnership certification: less than 10 percent effectively connected gain) — supports: 10% withholding on the amount realised unless an exception applies; exceptions include the transferor's certification of non-foreign status or of no realised gain, and the partnership's certification that less than 10% of its net gain would be effectively connected
6. 26 U.S.C. 7704 - Certain publicly traded partnerships treated as corporations. U.S. Congress (US Code via LII), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 7704(a)-(b); (c)(1)-(3) — supports: Publicly traded partnership definition (established securities market, readily tradable on a secondary market or substantial equivalent); treated as a corporation unless the (c) exception applies (90% or more qualifying income for the year; not available to certain partnerships that would be regulated investment companies)

• Secondary Pricing
• Unfunded Commitment
• Limited Partnership Agreement (LPA)
• Secondaries

• Denominator Effect
• Distributions to Paid-In (DPI)
• GP-Led Secondary