In this article, we want to explore the growing role that they are playing in the private equity space, and its relevance and attractiveness as an asset class.

An LP-led transaction occurs when an existing limited partner sells its fund interests on the secondary market. They are initiated by investors seeking liquidity or portfolio rebalancing and offer a way to crystallize gains and manage allocations enhancing broader market efficiency.

The activity on the LP-led segment has increased significantly in the last decade, showing a 14% CAGR from 2013 to 2024. This growth is largely underpinned by long term structural trends for more market efficiency in the alternative space but has been exacerbated due to liquidity pressure from low exit activity, as traditional exit routes like IPOs, strategic sales and sponsor-to-sponsor transactions have been challenged. The buyer universe targeting these opportunities has also expanded, making supply meet demand and driving market growth.

If we segment this LP-led secondary activity, we see that it is particularly concentrated in the private equity buyout sector, in terms of asset class, and in North America, in terms of geography. Nevertheless, the rest of the market is also quite active and growing, with rising activities in other asset classes like real estate, credit and venture capital. The European secondary market is also very active and growing in importance.

Pricing is a central consideration in any LP-stake transaction. Although highly bespoke, it is shaped by a range of factors, including the asset class, vintage year, investment strategy, fund size, manager quality, the strength of the underlying portfolio, and current valuation of portfolio companies. LP stakes are usually purchased at a discount from the NAV of the position that you are transacting, but, occasionally, they are purchased at a premium, particularly in situations when the NAV of the portfolio is very conservatively reported or an exit is expected.

Diving deeper into some of the factors affecting pricing, we can see how average pricing changes depending on fund size. Larger funds trade at a 9.5% average discount, which is lower than the average 13.5% discount for mid-market or small buyout funds. This is largely driven by the fact that there is a larger buyer universe of these positions, while there is a smaller buyer universe of smaller fund positions, and hence lower competition, translating in lower pricing.

Additionally, when considering the average buyout pricing by age of fund, we see that younger funds usually attract lower levels of discount than older funds. This is typically because when funds are older, they are sold as “tail-end” positions, as managers aim to generate liquidity. Younger funds in contrast, have more upside potential; hence they tend to trade closer to par.

As discussed, although certain pricing trends exist based on fund size and age, LP-stake pricing remains highly bespoke and driven by the specifics of each opportunity. Additionally, as the market continues to mature, a broader range of structuring tools is also emerging to help enhance returns. These include partially financing acquisitions with NAV-based credit facilities and using delayed-purchase-price structures, in which buyers accept lower discounts in exchange for paying only a portion of the consideration upfront, with the balance deferred and settled in stages over time.

For investors, LP-led secondaries offer a compelling set of attributes that can enhance the overall construction of an alternative’s portfolio. Acquiring diversified, seasoned positions at discounts to NAV provides a natural margin of safety and reduces blind-pool risk and improving clarity around sector exposures, manager quality, and unrealized value. The built-in diversification across multiple funds and assets can help dampen volatility while providing exposure to portfolios that are often closer to exit, potentially accelerating distributions.

However, pricing is a key element of generating consistent returns in the LP secondary space, hence investments in this space require certain levels of sophistication. Investors with strong GP relationships, sourcing networks, and access to detailed market information may be able to appropriately price opportunities and capture attractive risk-adjusted returns compared to investors with less sophistication or market expertise and footprint.

As market conditions continue to shift, LP-led secondaries are poised to remain a critical mechanism for rebalancing, deploying capital efficiently, and navigating a private markets environment where liquidity is increasingly valuable.