LP-Led Secondary
An LP-Led Secondary is a transaction where an LP sells its fund interest to a secondary buyer, typically to manage liquidity, pacing, or rebalancing rather than to restructure the underlying portfolio. Allocators evaluate LP-led secondaries through pricing relative to NAV, portfolio quality look-through, manager consent/transfer dynamics, and whether discounts reflect real risk or temporary liquidity-driven market conditions.
LP-led secondaries are the “classic” secondary transaction: an LP sells an existing fund interest. Institutionally, the edge is often in pricing and underwriting the look-through exposures—especially when sellers are motivated and markets are dislocated. But adverse selection exists: the question is why the LP is selling and what is being sold.
From an allocator perspective, LP-led secondaries affect:
- entry pricing and discount capture,
- portfolio look-through risk,
- transfer mechanics and consent risk, and
- distribution timing assumptions.
How allocators define LP-led secondary risk drivers
Allocators segment LP-led deals by:
- Seller motivation: liquidity need, rebalancing, regulatory, portfolio clean-up
- Fund quality look-through: manager quality, asset quality, remaining runway
- Pricing: discount/premium to NAV adjusted for quality and exit timelines
- Transfer/consent dynamics: GP consent, transfer restrictions, information access
- Duration: remaining fund life, distribution pace, exit environment sensitivity
- Market regime: discounts widen in stress; tighten in competitive markets
- Evidence phrases: “secondary sale,” “LP interest,” “transfer,” “discount to NAV,” “distribution pace”
Allocator framing:
“Are we buying quality exposure at a liquidity-driven discount—or inheriting a long-duration, weak portfolio with slow distributions?”
Where LP-led secondaries sit in allocator portfolios
- secondaries allocations for liquidity management and vintage shaping
- used by institutions to accelerate deployment into known managers
- can complement primaries by managing pacing and reducing blind-pool risk
How LP-led secondaries impact outcomes
- discount capture can materially improve net IRR when underwriting is accurate
- slow distributions can reduce IRR even if MOIC is acceptable
- consent issues can delay closing or restrict information
- market cycles can materially affect exit timing and realized value
How allocators evaluate LP-led secondary managers
Conviction increases when managers:
- underwrite asset-level look-through, not headline NAV
- maintain disciplined pricing with conservative distribution assumptions
- have strong process around transfer mechanics and GP relationship management
- demonstrate performance across dislocated and competitive markets
- provide transparent reporting on discount drivers and look-through exposures
What slows allocator decision-making
- limited information access pre-close
- complex consent processes and transfer restrictions
- seller motivation that suggests adverse selection
- pricing that assumes perfect exits and tight timelines
Common misconceptions
- “Discount guarantees return” → discount helps only if NAV and timing are real.
- “LP-led is simple” → consent and information constraints can be material.
- “Motivated sellers mean bad assets” → sometimes it’s liquidity/pacing, not quality.
Key allocator questions
- Why is the LP selling and what is the motivation?
- What is the look-through portfolio quality and remaining value drivers?
- What is realistic distribution pace under conservative assumptions?
- What restrictions/consents can delay or impair the transaction?
- How does pricing compare to quality-adjusted NAV and exit timing?
Key Takeaways
- LP-led secondaries are pricing + look-through + timing underwriting
- Discount capture is powerful but not sufficient alone
- Transfer mechanics and information access can determine execution success