Secondaries returns boosted by asset expansion

Private market secondaries investing is attracting increased attention and scrutiny. The focus centers on the actual sources of returns in these transactions.

Discounts are just the starting line

Many explanations highlight discounts as the key factor. Secondaries transactions usually price relative to the most recent net asset value of the underlying investments. If a buyer acquires an interest at 90% of NAV, the 10% gap appears to be the obvious profit source. This explanation is simple and intuitive, but incomplete.

Discounts play a role, though they rarely tell the full story. More often, they serve as the entry point rather than the final outcome. The real driver of returns emerges after the deal closes.

Two ways to buy in

Secondaries investing involves acquiring existing stakes in private market funds instead of committing capital at the start. Investors enter partway through a fund’s lifecycle, after assets have already been selected and deployed. This allows them to evaluate real portfolios rather than theoretical future investments.

Transactions generally fit into two categories. In limited partner-led deals, an existing investor—such as a pension fund or endowment—sells its stake to a secondary buyer. The original general partner continues managing the fund, handling all investment and operational decisions.

In GP-led transactions, the fund manager initiates a restructuring. A select group of assets moves into a new vehicle, often a continuation fund, and investors decide whether to sell or roll their stake forward.

In both scenarios, the secondary investor’s role is analytical. The GP remains responsible for managing the assets. The buyer must assess the manager’s quality, understand the underlying assets’ value, evaluate risk and growth potential, and determine a fair price.

This distinction matters. Secondaries investing isn’t just about purchasing at a low price and waiting for the gap to close. It requires judging the future performance of mature assets already in motion.

The math behind the returns

Take an investor who buys assets valued at 100 for a price of 90. The apparent value created at entry is 10. If those assets grow to 150 over time, the total gain becomes 60. Only 10 of that comes from the initial discount. The remaining 50 results from growth in the underlying assets themselves.

These increases stem from revenue growth, operational improvements, and value creation driven by the GP—the same factors that influence private markets performance overall. The discount may improve the entry point, but it doesn’t replace the need for asset growth. Without it, returns remain limited. With it, the importance of the entry discount diminishes over time.

This pattern isn’t just theoretical. Across the secondaries market, most value creation comes from the growth of underlying companies after acquisition, not the entry price alone. This shifts attention to underwriting discipline and analytical rigor.

Pricing still plays a role, but in secondaries, the focus is less on chasing the largest discount and more on accurately assessing fundamental value. Buyers must determine whether the underlying portfolio is worth what the GP claims, whether growth potential remains, and if the price allows for an attractive return.

Secondaries investing was once viewed as a niche strategy for those seeking liquidity or portfolio rebalancing. The shift in perception recognizes that its returns depend on the same fundamentals as primary private equity. The difference lies in betting on assets with a track record rather than a pitch deck.

This makes the strategy demanding. Investors must look beyond the headline transaction price to evaluate what lies beneath. For advisers building private markets exposure, the implication is clear: selecting the right secondaries manager carries more weight than the size of the discount.

The appeal of secondaries is clear. They provide access to mature assets, shorter time to distributions, and diversified exposure across managers, sectors, and vintages. These features create a distinct risk-return profile within a broader private markets allocation. However, they don’t remove the need to understand performance drivers.

When discounts are treated as the main source of returns, they can obscure a more important question: what is the quality of the underlying portfolio, and how much further value can still be created? That is the core challenge in secondaries.

Buying below NAV isn’t enough. Investors must grasp what they’re purchasing, who manages it, how diversified the portfolio is, and where future performance will likely come from. Discounts, when they exist and are priced carefully, contribute to the return profile. They are one factor among several—not the strategy itself.

In the end, secondaries returns rely on the same principles as private markets returns broadly: the compounding growth of underlying assets over time. The discount may be the easiest part to identify, but it rarely does most of the work.