HOW HAS THE CONFLUENCE OF HIGHER RATES, SLOWER M&A ACTIVITY AND RISING DRY POWDER IMPACTED DEAL FLOW IN THE SECONDARY MARKET?
Justin Lux: Despite a complex macro backdrop, the secondary market continues to grow at a remarkable pace. 2024 marked a record-breaking year for transaction volume, and we expect total deal flow to surpass $200 billion in 2025—effectively doubling in just two years.
Several factors are driving this expansion. Capital flows into secondary funds have increased meaningfully from institutions as well as from the private wealth channel, fueled by the growing adoption of evergreen funds. A broader buyer base has supported pricing and encouraged limited partners (LPs) to use the market more strategically. In 2024, the average age of funds sold fell to a record-low 6.6 years, highlighting a shift from liquidity-driven sales to proactive portfolio management. Notably, a recent Lazard survey found that, for the first time, more LPs cited portfolio rebalancing as the primary reason for selling than to raise liquidity—51% compared to 33%.1
Liquidity needs persist, however, driven by the knock-on effects of higher interest rates—namely reduced M&A activity, wider bid-ask spreads and a sluggish IPO market. These dynamics have slowed exit activity and curtailed distributions to investors. A healthy secondary market serves as a critical outlet for LPs seeking liquidity and allows general partners (GPs) to retain assets that they believe have material upside through continuation vehicles.
Patrick Gerbracht: As deal volumes have grown, we’ve remained disciplined in our investment process and highly selective in our sourcing, helping deliver strong performance across market cycles. Since 2009, our secondary investments have represented approximately 1% of total market volume, and we’ve historically closed on about 1% of the opportunities we screen—underscoring our focus on quality over quantity.
“We believe true value creation stems from acquiring high-quality assets at reasonable discounts and allowing fundamentals to drive returns.”
PATRICK GERBRACHT, Co-Head of LP Secondaries
HOW HAS THE MACRO BACKDROP IMPACTED PRICES IN THE SECONDARY MARKET?
Patrick Gerbracht: In addition to deal flow dynamics, pricing continues to be shaped by differences between LP-led and GP-led transactions. As of year-end 2024, average pricing for LP-led buyout transactions was approximately 94% of net asset value (NAV), while venture/growth strategies priced were closer to 75%. These are headline figures, however, and can vary significantly depending on the specific characteristics of each portfolio.
Ultimately, we believe true value creation stems from acquiring high-quality assets at reasonable discounts and allowing fundamentals to drive returns. Historically, approximately 81% of gains across our platform have been driven by value appreciation rather than purchase discounts.2 This reflects both the quality of the assets we target and our discipline around timing our entry point within a fund’s life cycle.
Justin Lux: GP-led secondary activity continues to be dominated by continuation vehicles, which represented 84% of GP-led volume in 2024. Continuation vehicles remain an attractive liquidity option, allowing GPs to retain exposure to their highest-conviction assets. Given the quality of these “trophy” companies, pricing trends closer to par—and, in some cases, even commands a premium.
MANY INVESTORS THINK OF SECONDARIES AS A BROADLY AUCTIONED MARKET, BUT YOUR TEAM OFTEN HIGHLIGHTS THE VALUE OF NEGOTIATED CARVE-OUT TRANSACTIONS. WHY DO YOU PREFER CARVE-OUTS?
Justin Lux: Some of the most compelling opportunities in today’s secondary market aren’t found in broad auctions, but in negotiated carve-out transactions—typically involving the acquisition of one or more specific fund interests from a larger LP portfolio. These deals are selectively negotiated and not typically widely marketed.
What differentiates carve-outs is that access is usually driven by deep sponsor relationships and a buyer’s standing with both the seller and underlying GPs. Many GPs impose transfer restrictions that limit who can step in as a new LP. Without a preexisting relationship—or inclusion on a sponsor’s approved LP list—a buyer may be blocked from transacting, regardless of price. In 2024, the share of GPs enforcing such buyer restrictions rose sharply from 43% to 61%.3
Patrick Gerbracht: Our ability to source and execute on carve-outs stems from more than 30 years of building trusted relationships across over 300 sponsors—particularly in the U.S. middle market buyout space. These relationships are multidimensional and grounded in our history of providing meaningful primary capital, which gives sponsors a window into how we operate, and lays the groundwork for future co-investment and secondary opportunities. Today, we serve on over 250 Limited Partner Advisor Committees, or LPACs, providing valuable insights into fund dynamics and underlying portfolio companies.
HOW DOES YOUR ABILITY TO ACCESS CARVE-OUT TRANSACTIONS TRANSLATE TO VALUE CREATION FOR YOUR INVESTORS AND WHY DO YOU PREFER THEM?
Patrick Gerbracht: Our ability to access carve-out transactions translates directly into value opportunities by allowing us to invest selectively—outside of competitive processes and often at more favorable terms. The combination of relationship access and institutional expertise gives us the opportunity to source high-quality assets and since 2008, approximately half of our secondary investments have been sourced through negotiated carve-outs.
While the influx of capital into mega-secondary—focused funds—those capable of underwriting $1 billion-plus LP-led deals—has improved overall market liquidity, many of these larger “mosaic” transactions offer investors limited ability to target specific managers or fund exposures. We take a more targeted path, focusing on smaller, more tailored opportunities—typically in funds or sponsors we know well through prior primary commitments or carve-outs from larger portfolios, particularly when sponsor transfer restrictions are in place.
Let’s say a large LP-led secondary portfolio comes to market with an average pricing level of 95% of NAV. Leveraging our sponsor relationships, we may be able to carve out a specific fund or funds and engage directly with the GP—with the goal of gaining real-time insights into the fund and underlying portfolio companies that inform our underwriting. This access may potentially enable us to acquire our portion at 90% or even 85% of NAV. While this doesn’t move the headline pricing for the seller, it could allow us to secure high-quality assets on more attractive terms.
“Some of the most compelling opportunities in today’s secondary market aren’t found in broad auctions, but in negotiated carve-out transactions.”
JUSTIN LUX, Co-Head of LP Secondaries
Justin Lux: Even in competitive situations, we believe our sponsor relationships are often a key differentiator, helping us win deals and drive value for our investors. In certain cases, our proprietary insights into underlying companies and funds can give us the confidence to pay a premium when warranted. In our experience, this combination of selectivity and relationship-driven access has increased our potential to underwrite to our return targets—without relying on leverage as much as some of our competitors.
WHY HAVE YOU HISTORICALLY NOT EMPLOYED FUND LEVEL LEVERAGE?
Justin Lux: We’ve historically taken a highly disciplined approach to leverage, choosing not to use fund-level leverage. While leverage can amplify returns, it also introduces risk, particularly when markets are volatile or when cash flows become less predictable.
Some of our peers have used leverage to help meet return targets. The challenge is that leverage cuts both ways. If you get everything right—pricing, asset selection, timing—leverage can enhance internal rates of return (IRRs). But if you’re off on any of those variables, the downside is magnified. In today’s market, with tighter discounts, more conservative underwriting and higher base rates, that margin for error is meaningfully smaller.
While we may consider fund-level leverage in the future where it aligns with our risk and return objectives, our approach will remain grounded in discipline and selectivity. We believe attractive risk-adjusted returns come from avoiding unnecessary complexity, staying disciplined on pricing, and leaning into relationship-driven opportunities where we can underwrite with conviction. It’s how we build portfolios designed to compound value over time.
