How does secondary market pricing work for PE interests and what is the NAV discount?

Question

AcadiFi · Accepted Answer

The secondary market for private equity lets LPs sell their interests in PE funds before the end of the fund's life, typically to specialized secondaries buyers. Transactions are priced as a percentage of reported net asset value (NAV) at a reference date.

Historical pricing ranges from 5 to 15 percent discount to NAV in normal markets, but can widen to 30 to 50 percent during stress (Q1 2009, Q2 2020, Q4 2022). Several factors drive the discount:

1. NAV staleness — GPs report NAVs quarterly with a lag; marks may not reflect current multiples.
2. Liquidity premium — buyers demand compensation for tying up capital.
3. Unfunded commitments — buyer takes on future capital calls at the buyer's cost of capital.
4. Fees and carry to the GP on remaining upside.
5. Information asymmetry — the seller often has better information about the fund's quality.
6. Bid-ask spread in thin markets.

Example: pension investor Linnea Sundström-Okafor at Nordfell Municipal Retirement wants to sell a 50 million NAV stake in Brookwater Buyouts II, vintage 2019. Secondary buyer Greenline Secondaries offers 87 percent of NAV, or 43.5 million, assuming the 20 million in unfunded commitments. The 13 percent discount reflects stale marks (market multiples compressed recently), buyer's required IRR of 15 percent, and near-term expected distributions.

Secondary market volume has grown dramatically, exceeding 110 billion in 2023 (Jefferies). GP-led secondaries (continuation funds) are a newer structure where the GP brings existing assets into a new vehicle for LPs to either roll or cash out.

How does secondary market pricing work for PE interests and what is the NAV discount?

Master Level III with our CFA Course

Related Questions

Practice Questions