What are secondary fund transfers, how do they work, and how are they priced?

Transactions in or related to existing private equity fund interests, or ‘secondaries transactions’, have increased dramatically since 2000.  Prequin in its 2024 Fundraising Report states that secondaries represented around 6.5% of total private equity global AUM in 2023 (which equated to a 2023 global secondaries market of $489 billion) as opposed to 1.8% in 2000.  In terms of transaction volume, some sources estimate that there were secondaries transactions in 2025 with a total transaction value of $165-200 billion.

This can be attributed in part to the significant amount of uncalled capital awaiting allocation to make investments, so-called ‘dry powder’.  As at the end of 2024, the BVCA estimated that there was approximately £190 billion of dry powder under the management of UK GPs alone with S&P Global estimating 2025 global dry powder at $2.184 trillion.

Secondaries have become a separate asset class in their own right and a vital liquidity mechanism for investors holding primary fund interests, with GP-led secondaries enabling GPs to retain management of high performance assets.

What are private equity fund secondaries?

Private equity funds are typically structured as limited partnerships and, as a general rule, do not offer redemption or withdrawal rights to investors.  Once a private equity fund investor (LP) has committed capital to the fund, that capital is locked up until the fund realises its investments and commences distributing proceeds until final liquidation, which can be longer than the standard 10 year fund life span (Prequin estimates the average life span to liquidation at 15 years).

The LP may wish to (a) acquire an interest in a particular fund that has already been closed to new investment for asset allocation reasons; or (b) dispose of an existing fund interest that it holds to generate cash for investment or liability/expense purposes.  Transactions such as these that are initiated at the behest of the investor or LP are termed “LP-led secondaries”.

Conversely, a fund manager or general partner (GP) is typically required under the constitutional document of a fund to realise all fund assets and distribute the proceeds of sale following expiry of the fund’s term (which is typically around 10-12 years).  GPs naturally may want to retain management of assets that they believe will deliver good performance in the future and/or which are strategic to their overall strategy, while still offering liquidity to the LPs of the fund holding the asset.

GPs have therefore developed a number of different mechanisms, with continuation funds being the most prevalent, to facilitate retention of quality assets.  Transactions that are commenced by the GP are termed “GP-led secondaries”.

Secondaries in the private fund context should not be confused with so-called “secondary” share sales in venture-backed companies, which involve the transfer of shares in a company running the operating business rather than interests in a commingled fund vehicle.

LP-led secondaries

In its simplest form, a LP-led secondary transaction involves the sale of a private equity fund interest held by an existing investor to a new investor.  The asset being sold is some or all of the selling LP’s interest in the limited partnership fund (LP interest), rather than shares or beneficial interests in that fund’s underlying portfolio companies.

For the sale of a single LP interest, there are two principal agreements that are required, the SPA and the Transfer Agreement.

SPA

The lawyers of the selling LP will usually prepare a sale a purchase agreement (SPA) that sets out the purchase price to be paid by the buying LP; how distributions from the fund should be treated commercially that are received by the seller during the period from signing the SPA to completion of the transaction (typically the date that the GP of the underlying fund registers the buyer LP as legal owner of the LP interest being sold); and other legal terms.

The SPA is then provided to the buyer and is negotiated between those parties.

Transfer Agreement

Assuming the GP is comfortable admitting the buying LP as a limited partner in the fund, lawyers to the GP will prepare an instrument of transfer (Transfer Agreement) between the GP and the transferring and buying LP, under which the GP will consent to the transfer of the LP interest (as interests in funds may only be transferred with the GP’s consent) and the LPs will give various representations and warranties to the GP.

In the case of the buying LP, it will need to give most of the representations and warranties and provide the information that was required of the selling LP in its subscription agreement when it originally invested in the fund (subject to any updates following legal/regulatory change).  Given LP interests are not freely transferable and the buying LP will ultimately become an investor in the underlying fund, the GP of the underlying fund:

• has to conduct and be satisfied with know-your-client and anti-money laundering checks on the buying LP;
• will need to be satisfied as to the creditworthiness of the buying LP (as further drawdowns of capital may still occur); and
• may want to assess whether the buying LP could be problematic for the GP from a legal, tax or commercial perspective.

In more complex cases involving institutional LPs, multiple LP interests across a variety of GPs may be sold to one or more buying LPs, which naturally are significantly more complex transactions to facilitate.

It is worth noting that some of the largest buying and selling LPs of secondaries are themselves funds and their GPs that specialise in buying and selling secondary interests in private equity funds (Secondary Funds).

Commercial drivers of secondaries

Aside from providing liquidity to selling LPs, LP-led secondaries fulfil a number of functions for buying LPs:

• Diversification and active portfolio management – the buying LP may not have exposure to the asset class of a target LP interest or closed-ended funds generally. The buying LP may invest in one or more LP interests to diversify its portfolio.  Blackrock indicates that its research suggests that, in 2023, 75% of secondary transaction volume could have been attributed to portfolio management.
• Access to key vintages – the LP’s existing portfolio may not have exposure to funds with target strategies that were closed to new investment in specific years (Vintages) and so are only available on the secondary market.
• Blind pool risk – investment in a new fund that is raising capital involves potentially more investment opportunity risk because that fund will not have made any investments yet and there will be no guarantee that it will secure good quality investment opportunities in the future.

GP-led secondaries and continuation vehicles

Alongside LP-led transactions, the market has seen substantial growth in GP-led secondaries.  In these transactions, the fund manager or GP initiates and structures the secondaries transaction.

The most common GP-led secondary is the continuation vehicle or rollover fund.  One or more assets that the GP wishes to retain are sold from an existing fund into a newly formed vehicle managed by the same GP or fund manager.

LPs in the existing fund are offered a choice between selling their interests for cash or rolling over their investment at a set valuation into the new fund.  Some existing LPs may not wish to participate in the rollover so consequently the GP will either need to match that amount with subscriptions into the new fund or more likely a combination of seeking fresh subscriptions and financing.

A rollover fund will enable the GP to (a) retain a select number of cherry picked assets from the existing fund with a view to increased returns on exiting those investments in the future; and (b) potentially triggering the payment to the GP of carried interest, assuming that the hurdle rate and return (or rather deemed return for rollover investors) of capital to investors triggers the waterfall.

GP-led secondaries typically involve greater asset concentration than traditional funds and often focus on one or a small number of high-performing or strategically important portfolio companies.  For GPs, continuation vehicles provide additional time and capital to maximise value, particularly where assets are deemed not yet ready for a trade sale or public offering.   For LPs, they offer optional liquidity and the ability to maintain exposure to assets in which they continue to have conviction.

The GP here has inherent conflicts of interest because it controls both the buying fund and selling fund, while also assessing the valuation of the assets to be sold.

Pricing secondaries

LP-led secondary transactions are typically priced by reference to the fund’s net asset value (NAV) as provided by the GP and/or the administrator of the fund, adjusted by an agreed discount or, less commonly, a premium. Fund NAV represents the GP’s valuation of fund assets and liabilities, usually reported quarterly.

Private equity assets are not listed on an exchange or other public market and consequently valuations are based on models, comparable asset analysis, recent transaction data and so on.  As a result, NAV determination is an estimate rather than an objective price that can be marked to market.

LP-led transactions are bilateral, negotiated solely between the buying and selling LPs with the GP only entering into the picture once they have reached an agreement in principle on pricing. One or both of the LPs will either have in house valuation capability or, if not, may appoint an independent third party to advise it as to pricing the secondary.

For GP-led continuation vehicles, the pricing dynamics will differ because selected assets will be purchased by the continuation vehicle.   The valuation of assets transferred into continuation vehicles has attracted particular regulatory scrutiny, given the GP’s incentives to influence pricing in a way that maximises its economic return.

There are of course many other GP actual or potential conflicts that need to be assessed by the GP in continuation fund scenarios, in addition to valuation.

Valuations and conflicts of interest

GPs may seek to ameliorate conflicts on valuations by:

• engaging in a competitive auction process whereby a principal or lead investor sets the price or by reference to a recent similar transaction priced at an arm’s length basis;
• seeking the consent of the limited partner advisory committee (LPAC) or potentially the consent of LPs by way of a fund vote;
• providing full disclosure of material data and potential conflicts of interest, including the potential economic benefits to the GP group in completing the rollover; and
• obtaining a fairness opinion from a third party valuation agent or investment bank.

Regulatory scrutiny: the SEC and the FCA

The growth of secondaries, and GP-led transactions in particular, has prompted increased regulatory attention in both the US and the UK.

In the United States, the SEC adopted new private fund advisor rules in 2023.  Among other measures, SEC-registered investment advisors conducting registered advisor-led secondary transactions will be required to obtain an independent fairness or valuation opinion and to provide that opinion to investors before they decide whether to sell or roll over their interests.  Advisors must also disclose any material business relationships with the opinion provider.

The SEC’s rationale is that LPAC consent alone may be insufficient to address the conflicts inherent in GP-led transactions, particularly where valuations directly affect sponsor compensation.   Advisors are also required to report GP-led secondary transactions on Form PF, increasing regulatory visibility of GP-led transactions by SEC registered advisors.   Although elements of the new rules are subject to legal challenge, they reflect a clear regulatory focus on transparency and conflict management, noting that the SEC voted to delay the commencement of reporting under the amended form PF to 1 October 2026.

Historically, a fairness opinion would be addressed to the GP and/or its funds and could not be legally relied upon by the LPs in the existing fund or continuation fund.  Occasionally, the members of the LPAC would be able to rely on the opinion, but solely in their capacity as LPAC members.  The new rule IA-6383 only requires the fairness opinion to be delivered to LPs rather than being addressed to them. Consequently, the expectation is that the giver of the opinion will address its opinion to the GP/funds (who may legally rely on it) and not LPs.

FCA’s multi-firm review into valuation practices

In the UK, the FCA has approached the issue through supervisory review rather than additional prescriptive rule-making.  In March 2025, the FCA published the findings of a multi-firm review into valuation practices for private market assets.  The review identified weaknesses in the identification and documentation of conflicts, limited functional independence in valuation processes, and insufficient consideration of how valuation decisions impact management fees and carried interest.

UK regulated alternative investment fund managers (AIFMs) are already legally responsible under the Alternative Investment Fund Managers Regulations 2015 (AIFMR) and associated regulations for asset valuation and calculating fund NAV.  The conclusions of the FCA’s were that firms should consider whether to make improvements in the governance of their valuation processes, identifying and dealing with conflicts, ensuring independence in the valuation process and incorporating defined processes for ad hoc valuations.

As the FCA pointed out, the fairness in a continuation fund context of pricing is dependent on whether the investors have sufficient access valuation data that would enable them to form their own view as to the valuation of the assets.  The report indicated that most valuations, depending on asset class, were based on a market approach (essentially looking at comparable transactions) or income approach (discounting future cash flows to a current discounted amount).

Under Fund 3.9R  of the FCA Rules, a UK authorised AIFM is required to appoint an external valuation agent if the AIFM itself does not conduct the valuation.  The FCA found in its review that it was rare to find complete delegation of valuation responsibility to the external valuer with most AIFMs using the external valuation to support their valuation for which the AIFM remained responsible.  The FCA indicated in its concluding remarks that it will consider its findings when assessing the UK implementation of the EU alternative investment fund regime.

Potential causes of action

In a typical LP-to-LP secondary, the selling investor gives only limited warranties, usually relating to title and authority only.  GPs do not typically provide warranties to buyers, and the transaction is unlikely to constitute marketing for AIFMR purposes (in respect of which the GP/AIFM would owe duties of disclosure to the prospective investor).

As a result, causes of action are limited, although claims for fraudulent or negligent misrepresentation could arise in extreme cases, particularly where valuation information has been knowingly misstated.

GP-led secondaries present greater legal risk to the GP. Where fund managers prepare offering materials for continuation vehicles or actively facilitate investor exits, marketing and financial promotion rules may apply under UK and EU law.  In the US, registered investment advisors remain subject to broad anti-fraud obligations.  In all jurisdictions, failures to manage conflicts appropriately or to provide fair and accurate disclosure increase litigation and regulatory risk.

Concluding thoughts

Secondaries have evolved from a niche liquidity solution into a core feature of private equity fund portfolios.  They offer flexibility to investors, strategic optionality to GPs and access to mature assets for buyers. At the same time, they expose structural tensions around valuation, information asymmetry and conflicts of interest.

For fund managers, the direction of travel is clear.  Robust valuation processes, careful conflict management and transparent disclosure are no longer optional, particularly in GP-led transactions. For investors, secondaries require careful diligence and a clear understanding of both pricing mechanics and legal risk.

As the market continues to grow and regulatory scrutiny intensifies, those participants who approach secondary transactions with discipline, transparency and commercial realism will be best placed to navigate an increasingly complex landscape.

If you have questions or queries relating to secondary sales or fund structuring more generally, please do reach out to a member of the team.  This article was written by Winston Penhall, with input from Martin Cornish and Henry Humphreys.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law