SecondariesHard

3 min read · 521 words

What the seat actually does

A private fund locks capital up for years. Somebody who cannot wait — a pension rebalancing, a bank exiting, a family needing liquidity — sells their stake to somebody who can. This seat is the buyer.

The price is set against a number that is already old. The manager's last reported value is a valuation, produced quarterly, of assets with no market price. A secondary trade is negotiated as a discount or premium to that stale figure, adjusted for everything that has happened since — which is why the seat is really an underwriting exercise on the underlying companies rather than a trade in a fund stake.

• LP stakes — buying an investor's position in an existing fund, with its remaining commitments attached.
• Continuation vehicles — a manager moving an asset into a new fund with new investors. See continuation funds.
• Structured solutions — preferred capital against a portfolio rather than an outright sale.
• Portfolio diligence, company by company, on assets already several years old.

A day, and where it goes

• Reported values — the latest manager marks, and how old each one is.
• Underwriting the underlying companies, which is the actual work and is done on partial information.
• Unfunded commitments, because buying a stake means taking on what is still to be called.
• Consent — most stakes cannot transfer without the manager's agreement.

What it is measured on

• Return against capital deployed, and how quickly — buying a mature fund is meant to shorten the wait.
• Discount captured against what the assets turned out to be worth, not against the mark.
• Whether the diligence was right on assets the seller knew better than the buyer.
• Pacing — how much was committed in each vintage, which decides the shape of everything later.

What it touches on this site

• What is being bought — private equity funds, venture funds and private credit.
• The transaction — the continuation fund, on the transaction half.
• The arithmetic — IRR and NPV, and why time is the whole of the return here.
• What the wrapper changes — the analysis, since a stake is a claim on a fund rather than on the companies directly.

How it goes wrong

• Buying the mark instead of the assets. A discount to a stale value can still be a premium to reality.
• Adverse selection. The seller has held these assets for years and is choosing to leave.
• A conflicted continuation vehicle, where the same manager is on both sides of the price.
• Unfunded commitments arriving at the moment the buyer least wants to fund them.

Concepts to master

• A reported value is an opinion with a date on it. Everything in this seat follows from that.
• IRR rewards speed, so buying a fund halfway through flatters it — see IRR and NPV.
• The J-curve: early fees and no realisations make a young fund look worse than it is, and a secondary buyer skips that.
• Liquidity has a price, and here it is the whole transaction — see what liquidity costs.