Secondary Funds Explained

A secondary fund is a type of private fund that acquires existing interests, such as a limited partner's stake in a private equity or venture fund, or a portfolio of company holdings, from a seller who wants or needs to exit before the original fund winds down. The word "secondary" refers to the fact that the interest is being bought from a prior owner, not newly issued.

Secondaries come in a few common forms. In an LP-led transaction, an investor sells its fund interest. In a GP-led transaction, a fund manager moves one or more assets into a new vehicle and offers existing investors a choice to sell or continue. Some secondary funds also hold a mix of both approaches.

A fund of funds is a related structure that invests in other private funds. Some funds of funds include secondaries as part of their approach. Like all private fund investments, secondary funds are speculative and illiquid and can lose all of their value.

Traditionally, secondaries have been discussed as a way to access investments that are already partly built, so a buyer can see more of what the underlying fund holds than in a newly raised blind-pool fund. Others note that this is not a guarantee of any outcome, and pricing and asset quality still require careful review.

Institutions such as pension plans, endowments and family offices have long used secondary transactions to manage their own portfolios. Individuals have more often come to them through funds of funds or feeder structures that pool investor money.

Access has typically been limited to accredited investors under SEC Rule 501(a), and offerings are usually made under Rule 506(b), which prohibits general solicitation, or Rule 506(c), which allows general solicitation but requires all purchasers to be accredited and the issuer to take reasonable steps to verify status. Investors in these funds often receive a Schedule K-1 for tax reporting, and tax treatment depends on individual circumstances.

The right independent fund manager may help you understand how a secondary strategy works, what the underlying assets are, how the manager sources and prices deals, and how the structure fits within a broader portfolio. A good conversation is usually about education and fit, not pressure. Past performance does not guarantee future results.

A first conversation generally involves the manager explaining their approach, the investor type the fund is designed for, the terms and fees described in the offering documents, and the risks. Any offering is made only by the issuer through its own offering documents, so read those carefully.

Useful questions to ask include: What am I actually buying, and how is it valued? How long might capital be tied up, and what are the exit options? What are the fees and expenses at each layer? How are conflicts of interest handled in GP-led deals? What are the accredited-investor requirements and how are they verified? Please also consult your own licensed attorney, tax professional and financial adviser.