Private Equity Secondary Investments

Key Features of Secondary Transactions

Secondary transactions are purchases of another investor’s interest in a private equity primary fund or a subset of companies within a fund. General partner (GP) and limited partner (LP) secondaries are a valuable means for enhancing liquidity and optimizing portfolio management.

LP-LED SECONDARY INVESTMENTS

Traditional secondary transactions are purchases of another LP’s interest in an existing private equity fund. Boosting liquidity and rebalancing portfolios are key motivations for selling a fund commitment in such LP-led transactions.

EXPANDING OPTIONS

The range of secondaries transaction types has expanded over the years to meet the varying and increasingly complex needs of investors. Solutions now include GP-led continuation vehicles, tender offers, preferred equity, fund recapitalizations and asset sales, captive team spinouts, and structured liquidity solutions, among others.

The rise of gp-led transactions

GP-led transactions have become significantly more popular in recent years and now account for almost half of all secondary market deals.¹ GP-led transactions are a way for a private equity manager to retain their interest in some of their best-performing assets beyond the normal holding period. This can allow them to create more value before exiting, perhaps at a time when valuations and market conditions are more favorable. The GP creates a continuation vehicle and rolls the asset(s) into this entity. LPs have the option to realize their investment or to buy into the continuation vehicle.

LP-Led Traditional Secondary Transaction Overview²

LP- and GP-Led Secondary Investments Benefits³

DISCOUNTS

Secondary investors often have the ability to purchase assets at a discount to their intrinsic value, creating an immediate, unrealized gain.⁴

EARLY LIQUIDITY

Secondary investors often receive capital distributions sooner because portfolio assets are closer to, or already in, the harvest period of a fund’s life cycle.

Diversification

Secondaries enable investors to manage risk by accessing a portfolio of companies across multiple managers, sectors, sizes, fund vintage years, and geographies.

VISIBILITY OF INVESTMENTS

Because the manager has begun deploying capital in companies, buying an interest in an existing private equity fund provides more visibility into the quality of assets in a portfolio, reducing blind pool risk.

Earlier gains

Secondary funds are designed to allow investors to mitigate the impact of the J-curve typically associated with primary fund commitments, as investments are made into funds at or near their harvest period, and therefore are more likely to enable investors to realize distributions at a faster pace.⁵

Secondary Transactions Can Provide Exposure to More Mature Investments⁵

A Growing Investment Opportunity

investor demand soars as secondary market expands

The private equity secondaries market has enjoyed significant growth in recent years due in large part to the attributes of the asset class as a tool to rebalance portfolios, provide diversification , and generate liquidity.

These characteristics helped secondary market transaction volume to reach a record $132 billion in 2021,⁶ from $37 billion in 2016.⁷ At $112 billion, deal volume in 2023 was the second-highest on record.¹ If the market sustains the 18.6% average annual growth rate achieved in the five years from 2019-2023, secondary transaction volume will exceed $275 billion in 2028.⁸

Growth drivers recently have included a high supply of net asset value (NAV) , decreased M&A and IPO activity, and stability in GP-led transactions. Secondaries have historically outperformed an index of traditional private equity and venture capital funds while maintaining a lower dispersion of return outcomes.⁹ This has further boosted their appeal to investors, since exposure to a resilient asset class that has historically delivered above-average returns with lower volatility can enhance overall portfolio performance.

Secondary Market Volumes Growing and Evolving¹

Secondaries Offer Premium Return Potential³

long-term OUTPERFORMANCE

Secondary funds exhibit greater resilience and stability compared to traditional private equity and venture capital funds, showcasing a long term ability to provide outperformance over various market cycles.

efficient capital allocation and superior investment selection

The since inception risk-adjusted returns of secondary funds have frequently surpassed those of traditional private equity and venture capital funds, indicating a more efficient allocation of capital and strong investment selection.

unique diversification

Secondary funds offer investors a unique diversification opportunity by providing exposure to a distinct asset class that has historically delivered above-average returns with lower volatility, enhancing overall portfolio performance.

Secondaries Have Offered Premium Return Potential with Lower Dispersion of Outcomes⁹

Key Terms

Direct Investment
An equity or debt investment directly in a company rather than via a fund.

Diversification
Spreading investments across asset classes, vintage years, geographies, sectors, investment managers, company size, or other factors. Diversification typically helps to manage risk in a portfolio and provide downside protection. Past performance is not a guarantee of future results; investments are subject to loss, including a complete loss, of capital.

GP | General Partner
Typically, a private markets firm responsible for the day-to-day operations of the partnership, including making investment decisions related to any assets held by the partnership. GPs aim to generate returns for LPs (investors) by investing partnership assets in a portfolio of private equity, private credit or other private market investment opportunities.

J–curve
A graphical representation of the typical private equity fund’s performance over time. Returns are typically negative during initial years as capital is called from investors and deployed into companies. As investments mature and managers exit investments, fund performance and the cash flows generated from investments improve and typically turn positive. This pattern of negative initial returns, followed by a subsequent positive slope as performance generates positive returns over time resembles the letter “J”, giving it its name. Past performance is not a guarantee of future results; investments are subject to loss, including a complete loss, of capital.

LP | Limited Partner
An investor in a limited partnership who has limited liability and typically does not participate in the day-to-day management or operations of the partnership, including decisions related to portfolio assets, which are managed by the partnership’s GP. An LP’s liability is typically limited to the amount of its capital commitment.

NAV | Net Asset Value
The sum value of an investor’s interest in a fund at a given time. It is calculated as the sum of all assets in a fund minus the liabilities of the fund.

Primary Investments
Commitments by a fund formed for the purpose of making investments into other investment vehicles, and where such commitments are typically made during the fundraising period for such investment vehicles’. Primary investments are sometimes referred to as blind pool commitments as the manager has not yet begun to deploy capital in portfolio companies.

Private Equity/Private Equity Fund
Equity investments made directly into privately held companies, ranging from start-ups to mature businesses with proven profitability.

A private equity fund pools capital from multiple investors to deploy in private companies. These funds aim to generate returns by acquiring equity stakes in
various opportunities. Managers of private equity funds seek to add value to portfolio companies through active management and strategic guidance to achieve profits
upon exit.

Venture Capital Fund Focus (Investment Stage)
The indicated area of specialization of a venture capital fund usually expressed as Balanced or Multi-Stage, Seed, Early Stage or Later Stage.

To see a comprehensive list of terms with definitions, visit the Advisor Academy Glossary >

Notes & Disclosures

1. Source: Jefferies H1 2024 Global Secondary Market Review, July 2024, Page 4.
2. For illustrative purposes only; the structures does not necessarily represent the structure or fund terms of any Adams Street investment vehicle; the structure and fund terms of any Adams Street investment vehicle are subject to, and qualified in their entirety by, the final governing documents of such offering.
3. For illustrative purposes only. There can be no guarantee that a private equity investment will exhibit all of the attributes or merits described herein or that even if it does, that such private equity investment will be successful as past performance is not a guarantee of future results.
4. There can be no guarantee that a general partner’s estimation with respect to “discount” is accurate, nor can there by any guarantee that such investments will ultimately be successful or that a general partner will be able to realize any such discount or other growth with respect to such investment.
5. There can be no guarantee as to the timing or size of cash flows or the timing of a secondary purchase and cash flows depicted are for illustrative purposes only and do not reflect actual cash flows of Adams Street Partners secondary investments. Past performance is not a guarantee of future results.
6. Source: Jefferies Global Secondary Market Review, January 2023, Page 2.
7. Source: Jefferies Global Secondary Market Review, July 2021, Page 4.
8. Source: Calculation based on estimated 2024 secondary market transaction volume of $140 billion+ and transaction volume growth metrics from 2019-23 in Jefferies H1 2024 Global Secondary Market Review, July 2024, Page 4.
9. Based on Burgiss data as of June 30, 2023. Numbers are subject to updates by Burgiss. Returns are net of General Partner fees, carried interest, and expenses. Burgiss is a recognized source of private equity data, and the Burgiss Manager Universe includes funds representing the full range of private capital strategies; however, it may not include all private equity funds. Burgiss returns are included for illustrative purposes only as a reference point for certain sectors of the private market data and calculations by Burgiss, sourced on October 26, 2023. The returns presented herein do not represent the return of Adams Street or any particular Adams Street Partners fund or investor.

Important Considerations: This information (the “Paper”) is provided for educational purposes only and is not investment advice or an offer or sale of any security or investment product or investment advice. Offerings are made only pursuant to a private offering memorandum containing important information. Statements made herein generally represent a mixture of (i) objective data attained through a variety of sources which are available upon request, as well as (ii) Adams Street’s analysis and related beliefs, opinions and views based on market observations, historical deal flow, experience and/or other factors; provided, however, that there can be no guarantee that this represents a complete universe of relevant data or opinions. Statements made represent current views and opinions as of February 2025 and are subject to change without any further obligation to update. All information has been obtained from sources believed to be reliable and current, but accuracy cannot be guaranteed. References herein to specific sectors, general partners, companies, or investments are not to be considered a recommendation or solicitation for any such sector, general partner, company, or investment. This Paper is not intended to be relied upon as investment advice as the investment situation of individuals is highly dependent on circumstances, which necessarily differ and are subject to change. The contents herein are not to be construed as legal, business, or tax advice, and individuals should consult their own attorney, business advisor, and tax advisor as to legal, business, and tax advice. Past performance is not a guarantee of future results and there can be no guarantee against a loss, including a complete loss, of capital. Certain information contained herein constitutes “forward-looking statements” that may be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Any forward looking statements included herein are based on Adams Street’s current opinions, assumptions, expectations, beliefs, intentions, estimates or strategies regarding future events, are subject to risks and uncertainties, and are provided for informational purposes only. Actual and future results and trends could differ materially, positively or negatively, from those described or contemplated in such forward-looking statements. Moreover, actual events are difficult to project and often depend upon factors that are beyond the control of Adams Street. No forward-looking statements contained herein constitute a guarantee, promise, projection, forecast or prediction of, or representation as to, the future and actual events may differ materially. Adams Street neither (i) assumes responsibility for the accuracy or completeness of any forward-looking statements, nor (ii) undertakes any obligation to update or revise any forward-looking statements for any reason after the date hereof. Also, general economic factors, which are not predictable, can have a material impact on the reliability of projections or forward-looking statements. Adams Street Partners, LLC is a US investment adviser governed by applicable US laws, which differ from laws in other jurisdictions.