Secondaries Market Report 2010 — A Price for Things That Had Only Had Marks

The secondaries market existed before 2008 and was small, specialised and slightly disreputable — selling a fund interest implied difficulty, and few did it.

The crisis changed the volume and the respectability at once. Per the US Venture Capital Report 2008, institutional investors faced the denominator effect, liquidity pressure and simultaneous capital calls across every private strategy. Selling fund interests became the only available lever, since private positions cannot otherwise be reduced.

The supply was therefore created by seller circumstances rather than by any view on the assets — which is exactly the condition that produces favourable pricing for a buyer, and exactly the condition that does not persist.

Prices in 2009 reflected this. Fund interests transacted at very substantial discounts to reported net asset value, and the discounts varied by strategy, vintage and manager quality.

The market's most important consequence was not the transactions but the information.

Before this market existed at meaningful scale, a private fund interest had a value determined entirely by the manager — quarterly, using judgment, validated by auditors but not set by them. There was no independent opinion.

A secondary transaction produces one. A buyer with no relationship to the manager, no incentive to support the mark, and their own capital at risk states what they will pay. That is a price rather than a mark, in the sense the US Venture Capital Report 2013 develops.

And the prices frequently disagreed with the marks, which is the informative part. A market pricing portfolios at a large discount to reported value is expressing a view about the reported value — and it is the only external opinion available.

Why a discount is not a return

The most common error in assessing a secondary purchase is to treat the discount as the profit, and the reasoning is worth setting out because it is intuitive and wrong.

The apparent logic: if net asset value is 100 and the buyer pays 70, the buyer has made 30.

Why this does not follow:

The net asset value is an estimate produced by the manager. It is not a market price, not audited into existence, and — per the Private Equity Report 2008 — subject to systematic upward bias, since managers have no incentive to write down and no mechanism forces them to. Paying 70 for something marked at 100 is only a gain if the 100 is right.

The portfolio may deteriorate. The buyer holds the same underlying companies as the seller, exposed to the same risks. A discount at purchase is a buffer, not a guarantee.

The unfunded commitment comes with it. Most fund interests carry an obligation to provide further capital when called. The buyer assumes that liability, which is a real commitment with uncertain timing — the demandable obligation described in the US Venture Capital Report 2008.

And the discount is partly compensation for genuine costs:

• Information asymmetry. The seller knows the portfolio better and has chosen to sell.
• Transfer friction. The manager must consent, the process takes months, and legal costs are real.
• And illiquidity continues. The buyer cannot easily resell.

A discount to net asset value is compensation for uncertainty about the net asset value, plus the cost of the liability being transferred. Treating it as embedded profit assumes the number being discounted is correct — which is the one thing the discount is telling you it may not be.

The correct framing is that the buyer is underwriting the underlying portfolio directly, arriving at their own view of value, and then deciding whether the asking price is attractive against that view. The reported net asset value is an input, not the benchmark.

Pricing two things at once

A fund interest is not a single asset, and the pricing must handle both components separately.

Component one: the existing portfolio. The buyer acquires a share of companies already owned. This can be underwritten directly — the holdings are disclosed, their financials are available to the buyer through the transaction process, and a view can be formed on each.

Component two: the unfunded commitment. The buyer takes on the obligation to fund future capital calls. This is a liability with three uncertain features:

• How much will be called. Not all commitments are drawn.
• When. Timing determines the liquidity requirement and the discount rate applied.
• And what it will buy. Capital called in year eight of a fund's life buys follow-on investment in existing companies; capital called in year three buys new investments the buyer cannot assess.

Why the two components can have opposite signs:

• A fund late in its life has a well-understood portfolio and little unfunded commitment. Almost all the value is in component one, and it can be underwritten precisely.
• A fund early in its life has an immature portfolio and a large unfunded commitment. Much of what is being bought has not been invested yet, which is closer to a blind pool.

So the same headline discount means different things depending on where the fund sits in its life, and comparing discounts across vintages without adjusting for this is meaningless.

The practical structures that developed to handle the mismatch — deferred payment, earn-outs, and splitting the funded and unfunded portions — exist because a single price cannot express two different views.

What the buyer actually gets

The buyer's advantages are structural and worth naming, because they explain why the market is a genuine business rather than merely opportunistic.

Information. A primary commitment to a new fund is a blind pool — the investor commits before knowing what will be bought. A secondary buyer sees the actual portfolio. This is a substantial reduction in uncertainty, and it is the market's most durable advantage.

A shortened J-curve. A private fund's reported returns are negative in early years: fees are charged from the start, investments are held at cost, and value appears later. A secondary buyer entering after this period skips it, so reported returns turn positive much sooner.

Immediate diversification by vintage. A buyer can acquire exposure to several vintage years at once, which a primary investor can only achieve by committing over many years.

A shorter duration. The fund is already partway through its life, so capital returns sooner. This matters more than it sounds for an investor's own cash flow planning.

The corresponding disadvantages are equally real:

• Adverse selection. Sellers choose what to sell. The average interest offered may be worse than the average interest held — though in a period of constrained selling this effect is much weaker, since sellers are choosing by liquidity need rather than by quality.
• No influence. The buyer inherits a relationship they did not build and terms they did not negotiate.
• And the manager must consent, which gives a third party a veto.

The adverse selection point is the crux of why 2009–2010 pricing was favourable:

When sellers sell because they need cash, the selection is random with respect to quality. When they sell because they have a view, it is not. The first condition is what made the founding vintage attractive, and it is a condition of the seller's circumstances rather than the buyer's skill.

This is the same finding as the Private Credit Report 2009 — forced selling produces prices that reflect constraints rather than value, and it does not last.

The market as an audit

The price discovery function deserves separate treatment, because it is the market's most valuable output and the least discussed.

The problem it addresses: private fund valuations are produced by the manager being evaluated. Auditors verify that a process was followed, not that the number is right, and there is no other check.

What a secondary market provides:

• An arm's-length opinion, from a party with capital at risk and no interest in supporting the mark.
• Regularly, as transactions occur across many funds and managers.
• And comparably, since pricing is expressed as a percentage of net asset value, which normalises across fund sizes.

What the prices revealed in 2009–2010:

• Very substantial discounts across most strategies, indicating that buyers did not believe the marks.
• Wide dispersion by strategy and manager, indicating that the disbelief was discriminating rather than general.
• And discounts that narrowed rapidly as conditions improved, which is itself informative — it suggests the discounts had reflected uncertainty and liquidity rather than a settled view that assets were overvalued.

The limitations are important and should not be understated:

• Coverage is partial. Only funds whose interests trade produce a price.
• The sample is not random. Sellers choose what to offer, so observed prices reflect the offered subset.
• And the price includes a liquidity discount for the transfer itself, so it is not a clean estimate of underlying value.

Nonetheless it is the only external evidence available, and it is used far less than it should be:

A manager reports a number. A secondary market states what someone will pay for it. When these disagree persistently, the disagreement is the most useful data point an allocator has about that portfolio.

Manager-led transactions begin

A structural development in this period changed what the market eventually became, and its origin was a genuine problem rather than a financial innovation.

The problem: a fund reaching the end of its life still holding assets. The fund must wind up, but selling the remaining companies into a poor market destroys value, and extending the fund requires investor consent and leaves everyone stuck.

The solution that emerged: a transaction organised by the manager rather than by a selling investor. The assets are sold into a new vehicle, funded by secondary buyers, with existing investors given the choice to take cash or roll into the new structure.

Why it addresses the problem:

• Investors wanting liquidity get it.
• Investors wanting continued exposure keep it.
• The manager continues to hold assets they believe have more to give.
• And the assets are not dumped into a bad market.

The conflicts are equally clear and were recognised immediately:

• The manager is on both sides — advising the selling fund and organising the buying vehicle.
• The manager sets the price, or heavily influences it, while having an interest in the outcome.
• The rolling investors and the selling investors have opposed interests, and the manager advises both.
• And the manager's incentive economics may reset favourably in the new structure.

The governance responses that developed — independent valuation, mandatory investor consent, advisory committee approval, and a genuine status-quo option — address these directly, and the practices took years to standardise.

The Secondaries Market Report 2019 and 2023 cover this becoming the market's largest segment, which was not remotely predictable in 2010.

Selling is a portfolio decision, not an admission

A shift in how selling was regarded began in this period, and it matters because the stigma had been imposing a real cost.

The prior norm: selling a fund interest signalled distress. An institution that sold was assumed to need cash urgently, which damaged its standing with managers and made future access to sought-after funds harder.

Why that norm was expensive:

• It prevented rebalancing. An institution over-allocated to a strategy, a vintage or a manager had no way to correct it.
• It forced holding relationships that had deteriorated. A manager whose team had changed or whose strategy had drifted could not be exited.
• And it meant portfolio construction was one-directional — commitments could be added and never adjusted.

What changed the norm:

• Volume. When many respected institutions sold simultaneously for the same structural reason, selling stopped identifying the seller as distressed. This is the same stigma-removal logic the UK Investment Report 2008 describes in bank recapitalisation — universal participation removes the signal.
• Articulated rationale. Sellers began explaining transactions as portfolio management — reducing manager count, rebalancing vintages, exiting non-core strategies.
• And managers adapted, since a functioning secondary market makes their primary fundraising easier by giving investors an exit.

The last point is the one managers took longest to accept and is straightforwardly true:

An investor who knows they can exit a ten-year commitment will commit more readily than one who cannot. A liquid secondary market raises the value of a primary commitment, which makes it a manager's interest rather than a threat to it.

The practical consequence for allocators is that active portfolio management became possible in private markets for the first time. Manager concentration, vintage imbalance and strategy drift could be corrected rather than merely regretted — which is a genuine improvement in what an institution can control.

The residual constraint is manager consent, which remains a real veto. An institution planning to use the secondary market should establish transfer expectations at the point of the primary commitment, when it has negotiating leverage, rather than at the point of sale, when it has none.

What an allocator could act on

Underwrite the underlying portfolio, not the discount. The reported net asset value is a manager's estimate with known upward bias, so the discount measures uncertainty about that number rather than embedded profit.

Price the funded and unfunded components separately. They have different information content and can point in opposite directions, and a single headline discount conceals which is which.

Adjust discounts for fund age before comparing them. A late-life fund's discount applies to a known portfolio; an early-life fund's applies substantially to investments not yet made.

Read secondary prices as an independent opinion on marks. It is the only external check on private valuations available, and persistent disagreement between the two is the most useful signal an allocator gets.

Distinguish liquidity-driven selling from view-driven selling. The first is random with respect to quality and produces favourable pricing; the second is adverse selection and does not.

Check governance on manager-led transactions. Independent valuation, genuine consent and a real status-quo option are the specific safeguards, and their presence or absence is verifiable.

What 2010 established

• The market's core output is price discovery — an independent opinion on marks that had none.
• A discount is compensation for uncertainty and transferred liability, not embedded return.
• A fund interest is two assets — an existing portfolio and an unfunded commitment — requiring separate underwriting.
• The buyer's durable advantage is information, since the portfolio is visible rather than blind.
• Favourable founding pricing came from seller constraints, which made it attractive and temporary.