Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Private Equity Secondaries
Transcript
- Lucas: So there's this quiet corner of private equity that's been booming for years, and most people outside the industry have never heard of it. I'm talking about secondaries — the market where investors buy and sell existing stakes in private equity funds. Luna: Right, like a secondary market for fund commitments. So instead of committing new capital to a fund, you're buying someone else's position in one that's already been investing for a few years. Lucas: Exactly. And for family offices, this has become a really practical tool. Let's say your family office committed fifty million dollars to a buyout fund back in 2021. Now it's 2026, you've had some liquidity needs, or maybe you want to rebalance into growth equity instead. You can't just call the general partner and ask for your money back — that's not how private equity works. Your money is locked up for ten years or so. Luna: And that's where the secondary market steps in — you sell your stake to another investor, often at a discount to its net asset value, and you get cash today instead of waiting for distributions. Lucas: Before we go deeper, I want to pause for a second. You know, these conversations we have every day — about lockups, discounts, how to think about liquidity — they take real work to research and produce. And a couple of dollars a month is genuinely what keeps these going. If you've gotten something out of the show, you can support us at buy me a coffee dot com slash fexingo. It makes a real difference in keeping this ad-free. Luna: Yeah, honestly, it's how we keep doing what we do. And it helps us spend more time digging into topics like this. Lucas: So back to secondaries. The market has grown a lot — industry estimates put annual volume in the hundreds of billions of dollars now. And family offices are on both sides of these trades. Some are sellers looking for liquidity, others are buyers who see an opportunity to get into a top-tier fund that was closed to new investors years ago. Luna: That's a key point — buying a stake in a fund with a proven track record, instead of committing blind to a new fund that just started investing. You get some visibility into the portfolio companies already. Lucas: Right, and that's attractive. But the pricing is what makes it interesting. In a normal secondary sale, the seller accepts a discount to the fund's net asset value. That discount reflects the fact that the buyer is taking on illiquidity and uncertainty. In the last few years, discounts have ranged anywhere from five percent to twenty percent or more, depending on the fund, the vintage year, and the state of the portfolio. Luna: So if a fund's NAV is fifty million, a buyer might pay forty million for your stake. That's a big haircut, but it turns illiquid paper into cash you can actually deploy elsewhere. Lucas: And that's the trade. But there's another layer here — general partner led secondaries. That's where the GP itself uses the secondary market to restructure a fund, often to hold onto assets longer or to provide liquidity for limited partners who want out. Luna: That's gotten more common, right? Continuation vehicles, where the GP moves assets into a new fund and existing LPs can either cash out or roll their interest into the new vehicle. Lucas: Exactly. For a family office, these deals can be a way to exit a position that's otherwise stuck, or even to increase exposure to a fund you really like if other LPs decide to cash out. Luna: So you could end up with a larger stake in a fund that's performing well, without having to commit new money to a fresh fund from the same manager. Lucas: That's the appeal. But there are real complexities. Valuing a private equity stake is not like pricing a public stock. You need to look at the underlying portfolio companies, the fund's cash flows, the remaining commitment period. It's an area where you really want a specialist advisor who understands the nuances. Luna: And there are also tax implications. Selling a stake can trigger capital gains, and the timing of those gains matters for a family office's overall tax strategy. Lucas: Right, and that's where the wealth management side comes in. A family office might coordinate a secondary sale with other portfolio moves, like harvesting losses elsewhere or timing the sale to a year when the family's taxable income is lower. Luna: It's a sophisticated dance, but it's one that's becoming more accessible. I've seen estimates that secondary market volumes have doubled in the past five years, and family offices are definitely part of that growth. Lucas: We're seeing more dedicated secondary funds that target family offices as investors, too. These funds buy stakes from original LPs and hold them for a shorter period, hoping to profit as the underlying assets mature. Luna: So it's not just about selling — some families are actively investing in secondaries as a strategy to get more predictable returns, since the J-curve effect is less pronounced. Lucas: Right, because you're buying into funds that have already made investments, so you're not waiting years for capital to be deployed. You might see distributions sooner than you would with a new fund. Luna: That can be really appealing for a family office that wants to maintain private equity exposure but with a shorter time horizon. Lucas: But it's not without risk. You're buying at a discount for a reason — the assets might be troubled, or the fund might be in its later years with few exits left. The due diligence process is critical. Luna: And you need to think about the general partner's alignment. In a gp led deal, the GP might be extending fees, which can be a red flag for some investors. Lucas: That's a good point. So family offices need to look beyond the headline discount and dig into the specifics of the deal structure, the management team, and the portfolio health. Luna: It's a lot like any other investment decision, then — you need to do your homework. Lucas: And that's why many family offices work with dedicated secondary advisors or use their in-house investment team to get comfortable with these transactions. It's not something you can rush into. Luna: The market is still evolving, too. We're seeing more standardization in how these deals are documented, which might bring in more participants. Lucas: It's a genuinely exciting area, and one that's changing how wealthy families think about their private equity exposure. Instead of a ten-year lockup, secondaries offer a way to adjust positions as circumstances change. Luna: And with the growth in the market, it's likely to become an even more common tool in the family office toolkit. Lucas: So if you're managing a family office, or just curious about how the ultra-wealthy handle liquidity, secondaries are worth understanding. They're a perfect example of how financial innovation creates new solutions for age-old problems. Luna: And it's a reminder that even in private markets, there's usually a way to find liquidity if you know where to look. Lucas: We'll be back tomorrow with another episode of The High Net Worth Podcast. Until then, keep thinking about how these strategies might apply to your own financial picture.