LP Secondaries and Pricing to NAV
An investor stuck in a ten-year private fund who needs cash sooner doesn't have to wait — they can sell their stake to another investor on the secondary market, usually at a discount to the manager's own reported net asset value.
Prerequisites: Valuation Marks and Fair Value Policy
A private equity fund typically locks investors' capital up for ten years or more, with no ability to redeem early the way a mutual fund allows. An investor who needs cash sooner — because their own circumstances changed, or because they simply want to rebalance a portfolio — can instead sell their entire LP stake (their limited partner interest, the right to future distributions from the fund) to another investor on the secondary market, a growing marketplace of specialized buyers who focus on exactly this kind of trade.
Why secondaries usually trade at a discount to NAV
The fund's manager reports a net asset value (NAV) for the stake each quarter, using the fair-value process described in Valuation Marks and Fair Value Policy. A secondary buyer, however, is taking on real risks that the reported NAV doesn't fully price in: the marks might be stale or optimistic, the buyer has to wait an unknown number of years for the underlying companies to actually be sold and cash to arrive, and the buyer typically has no ability to influence the fund's decisions in the meantime. To compensate for that illiquidity and uncertainty, secondary buyers generally offer less than 100% of reported NAV — the size of the discount rises and falls with market conditions, widening sharply when many sellers need liquidity at once (as happened broadly during 2022's denominator-effect-driven selling, see Commitment Pacing and the Denominator Effect) and narrowing when secondary capital is abundant and competing for deals.
What determines the price
A secondary buyer prices a stake based on the specific fund's vintage, the quality and diversification of its remaining portfolio companies, how close the fund is to the end of its life (less time to wait for cash generally supports a price closer to NAV), and the seller's own urgency — a seller who must close quickly to meet a liquidity need typically accepts a steeper discount than one who can shop the sale patiently across several potential buyers.
A secondary sale price below the manager's reported NAV isn't necessarily evidence the fund is worth less than claimed — it reflects the buyer being compensated for illiquidity, valuation uncertainty, and time until the fund actually distributes cash, on top of whatever view the buyer has of the underlying holdings.
A wide secondary discount during a market-wide liquidity crunch — many sellers, few buyers — is a market-clearing price shaped by supply and demand for liquidity, not necessarily a fresh, more accurate mark on the fund's true value. Reading every secondary transaction as a corrected NAV is a common overreach.
Related concepts
Practice in interviews
Further reading
- Preqin, Global Private Equity Secondaries Report