Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Private Equity Secondaries for Liquidity
Transcript
- Lucas: If you're an ultra-wealthy family and you've got capital tied up in private equity funds, you're used to waiting. Typically ten years or more to get your money back, plus any returns. Luna: Right. And sometimes you don't want to wait. Maybe you see a better opportunity, or you need liquidity for a major purchase or a market downturn. Lucas: Exactly. That's where the private equity secondary market comes in. It's basically a marketplace where existing investors can sell their stakes in private equity funds to other buyers before the fund has fully exited its investments. Luna: So it's like a secondary market for PE fund interests. How big is that market today? Lucas: It's grown enormously. In 2025, secondary transaction volume globally was about $140 billion, up from around $40 billion a decade ago. And it's projected to keep growing because more families and institutions want liquidity options. Luna: And who are the buyers? Other investors who want exposure to private equity but don't want to commit to a new fund? Lucas: That's one group. Also, there are dedicated secondary funds — firms like Lexington Partners, Ardian, and Coller Capital that raise capital specifically to buy these stakes. They typically buy at a discount to net asset value, so they can get a good deal. Luna: What kind of discount are we talking about? Lucas: It varies wildly. For a well-performing fund with strong underlying companies, the discount might be just 5 to 10 percent. For a struggling fund, it could be 30 or 40 percent. The seller gets liquidity, the buyer gets a discount — both sides have their reasons. Luna: So it's not just about getting cash out. It's also about portfolio management. Lucas: Exactly. Let me give you a concrete example. I spoke with a family office that had committed $100 million to a buyout fund in 2019. By 2024, they saw a great opportunity to invest directly in commercial real estate, but their capital was locked up. So they sold their stake in that buyout fund on the secondary market. Luna: And what did they get for it? Lucas: They sold it for about $50 million. The fund had appreciated, but they took a small discount to get liquidity quickly. With that $50 million, they went into a direct real estate deal they expected to yield 12 percent annually. For them, it was worth the discount. Luna: So it's a trade-off. You give up some upside for flexibility. Lucas: Exactly. And the secondary market has become more efficient. There are now platforms and intermediaries that match buyers and sellers, and the process can be completed in a few months rather than years. Luna: What about pricing? How do you know what a stake is worth? Lucas: Fund managers typically report net asset value quarterly, but that's an estimate. Buyers do their own due diligence — they look at the underlying portfolio companies, their valuations, the fund's performance track record, and the market environment. Then they bid a price. Luna: So it's not like selling a stock where you get the market price instantly. Lucas: No, it's much more negotiated. But the market has matured. There are now standardized documents and legal frameworks, especially for larger deals over $10 million. Smaller deals can still be bespoke, but it's getting easier. Luna: Are there any risks for the seller? Lucas: The biggest risk is that you might be selling at a low point. If the fund's companies are in a temporary downturn, you could take a bigger discount than necessary. Also, once you sell, you lose any future upside if the fund recovers. So it's a timing decision. Luna: And for the buyer? Besides the discount, what's the appeal? Lucas: The main appeal is that you're buying into a fund that's already been investing for a few years. You skip the 'J-curve' — the early years where the fund is calling capital and showing negative returns. You get a portfolio that's more mature, with some visibility on the companies. Luna: So you're getting a later-stage, potentially lower-risk exposure. Lucas: Exactly. And often at a discount. That's why secondary funds have become so popular. They offer a way to invest in private equity with a shorter duration and potentially higher returns because of the discount. Luna: Is this something only the ultra-wealthy can do? Or can ordinary investors get in on it? Lucas: Mostly ultra-wealthy families and institutions. Minimums for secondary funds are typically $5 million or more. But there are now some interval funds and closed-end funds that give retail investors exposure to the secondary market indirectly. Luna: So the trend is toward democratization, slowly. Lucas: Slowly, yes. But for our audience — families with $50 million or more — the secondary market is a tool they should know about. It's not a secret, but many wealthy families still think of private equity as a 'buy and hold forever' asset class. Luna: And they don't realize they can exit early if they need to. Lucas: Right. And that flexibility can be valuable. For instance, if a family wants to rebalance away from private equity into public equities or real estate, they can use the secondary market to adjust their allocation without waiting for fund wind-downs. Luna: What about tax implications? If you sell at a gain, you trigger a taxable event. Lucas: Yes, that's a consideration. But many families are sitting on unrealized gains, so they're used to that. And if they're selling at a discount, the gain might be smaller. Also, they might be able to offset with losses elsewhere. It's something to discuss with a tax advisor. Luna: Are there any other creative uses of secondaries beyond just cashing out? Lucas: Yes. Some families use secondaries to clean up their portfolio. Maybe they have a small stake in a fund they don't want to manage anymore. They can sell it and consolidate into larger, more strategic relationships. Luna: Or they might use it to exit a fund that's underperforming. Lucas: Exactly. If a fund is in the bottom quartile of performance, selling at a discount might be better than holding on and hoping for a turnaround. The secondary market gives you an exit hatch. Luna: It sounds like it's becoming a standard part of wealth management for the ultra-wealthy. Lucas: It is. And I think we'll see continued growth. As more private equity is raised — and it's a $12 trillion asset class globally — the need for liquidity will only increase. Families want options. Luna: You know, speaking of options, we get a lot of questions from listeners about these kinds of strategies. If today's episode helped you think about your own portfolio differently, it's worth mentioning that listener support is what keeps this podcast ad-free and independent. Lucas: Yeah, and if you found this useful, you can support us at buy me a coffee dot com slash fexingo. It's the smallest possible ask, and it genuinely helps us keep bringing you these deep dives. Luna: We don't have sponsors, so it's just listeners like you who make it possible. Anyway, back to secondaries — Lucas, what's next for this market? Lucas: I think we'll see more innovation. There are now 'gp led' secondaries, where the fund manager creates a new vehicle to hold certain assets, and existing investors can roll over or cash out. That's giving families even more ways to manage their liquidity. Luna: So it's not just selling to a third party. You can also restructure within the same fund family. Lucas: Exactly. And some families are using secondaries to do 'portfolio financing' — they don't sell the stake, but they borrow against it using the secondary market as a valuation benchmark. That's a whole other topic. Luna: Maybe we can cover that in a future episode. Lucas: Definitely. For now, the key takeaway is: if you're an ultra-wealthy family with private equity holdings, you are not locked in. The secondary market is there, it's liquid, and it's getting more efficient every year. Luna: And it's worth exploring with your advisor, especially if you're planning major moves or just want more flexibility. Lucas: Right. That's the takeaway. Thanks, Luna. Luna: Thanks, Lucas. Until next time.