Secondaries

Secondaries are purchases or sales of existing interests in private funds, as opposed to commitments made when a fund first raises money (the primary market). In a typical secondary trade, the seller transfers a fund position, including any remaining unfunded commitment, to a buyer at a negotiated price, usually expressed as a percentage of the fund's most recent net asset value. The fund manager's consent is normally required for the transfer.

The market exists because private fund positions are otherwise locked up for a decade or more. Secondaries give sellers a way out before the fund winds down, and give buyers entry into funds that are already partly invested.

Why it matters for family offices

For family offices with large private markets books, the secondary market works in both directions. As a seller, it is one of the few ways to raise liquidity from committed positions, whether to fund a major purchase, trim an allocation that has grown too large, or exit a manager relationship the family no longer wants. As a buyer, secondaries offer a shorter path to returns: the assets already exist and can be evaluated, much of the capital is already drawn, and the J-curve (the early years when fees outweigh gains) is largely behind the position. Discounts to net asset value can add to returns, though pricing moves with market conditions.

Selling below net asset value crystallizes a loss against the reported valuation, so families typically weigh the size of the discount against the value of having liquidity today.

How it shows up in practice

Suppose a family office committed $10 million to a buyout fund eight years ago. The position now shows $8 million of net asset value with $1 million still uncalled, but the family wants capital for a direct investment. It sells the position at a modest discount to net asset value; the buyer pays the price, takes over the $1 million unfunded commitment, and steps into the capital account. For the seller's records, the sale closes out years of calls and distributions and fixes the position's final return, while the buyer starts measuring performance from its purchase price. Clean records of every historic cash flow make the sale process faster, because buyers price what they can verify.