What Are Secondary PE Funds?
Secondary private equity funds—commonly referred to as PE secondaries—acquire interests in existing private equity funds or portfolios. Rather than participating in new (primary) fundraises, they purchase stakes from current investors such as Limited Partners (LPs) or through GP-led restructurings, often at a discount to Net Asset Value (NAV).
What Are Secondary Evergreen Funds?
Secondary evergreen funds combine the benefits of secondary strategies with an open-ended, semi-liquid structure. These funds:
- Accept ongoing subscriptions (usually monthly),
- Offer limited redemptions (typically quarterly),
- Continuously invest in secondary deals.
This stands in contrast to traditional closed-end drawdown structures, which have finite lifespans and lock-up periods. For a deeper comparison of evergreen vs. closed-end fund structures, see our breakdown here:
Closed-End vs Evergreen Funds: Key Differences
Understanding Discounts in Secondaries
A defining feature of secondaries is the opportunity to purchase assets at a discount. This occurs when the secondary buyer acquires a position below its last reported NAV.
Typical discounts range between 10% and 15%, but they can vary widely to Premiums for high-quality or “trophy” assets and Deep discounts (up to 50%) for hard-to-value or distressed assets.
Why Do Discounts Exist?
Several key drivers create discount opportunities:
- Liquidity needs (e.g., LPs needing capital or rebalancing their portfolio)
- Unfunded commitments that represent future capital obligations
- Hard-to-value or illiquid assets
- Market dislocation or volatility
How Discounts Impact Secondary Fund Performance
When a secondary fund acquires an asset at a discount, they immediately mark it to the last NAV (Net Asset Value) because of fair market value principles and standard industry accounting practices. This results in an increase (bump) in value for the Secondary fund whenever a discounted asset is purchased by the fund.
Why Timing Matters: The Case for Investing Early
Let’s walk through a simplified hypothetical example to understand why early participation in secondary evergreen funds can be so powerful:
- A new secondary evergreen fund raises $100 million with an initial fund priced at $10 per share.
- It purchases assets at a 10% discount.
- The assets are immediately marked at NAV, so the fund immediately reflects $110 million in value.
- NAV per share jumps from $10.00 to $11.00 → a 10% gain for early investors.
- In the following months, the fund raises another $100 million.
- It again buys assets at a 10% discount, adding another $10 million in embedded value and the total fund value becomes $220 million.
- The gain from the new discount ($10M) now reflects a ~5% increase across the fund.
- NAV per share rises to approximately $11.50.
Bottom line: The earlier investor benefits not just once, but repeatedly, as new capital flows in and discounts accrue. The early investor made a nearly risk free gain of ~15% in just a few months in the above example. In addition, a portfolio of PE assets should also gain in value of roughly 10% a year making a gain of ~30% in the first year as something very feasible through a combination of accrued discounts and asset appreciation.
A study by Cliffwater found that the first year return for the funds in secondary evergreen funds significantly outperformed returns in the second and third years—further reinforcing the value of early entry. Getting a 30% or higher return in the first year was not unusual among the funds that were studied.
Caveats
The market for secondary evergreen private equity funds stood at approximately $50 billion at the end of 2024 and is projected to grow rapidly in the years ahead. However, the maturity of the fund is just one factor in evaluating the attractiveness of a secondary fund.
Investors should also carefully evaluate:
- The track record and experience of the manager,
- The fee structure and liquidity terms,
- The strategy of the fund and the quality of the assets
- The fit of this asset class with the rest of the investor’s portfolio
- Whether the secondary fund can grow in size over time
Conclusion
The opportunity is significant, but the window is narrow. Investors who can identify quality managers and who can commit capital in that critical first few months can benefit from a structural advantage that builds over time.
Currently, there are a number of quality managers who are launching secondary evergreen funds to compete against one another making this is an opportune time to invest in this asset class.
If you’re considering adding this strategy to your portfolio and want help evaluating options, we’re here to assist.