Secondaries are now Primary

The growing role of GP solutions secondaries in accessing top performing PE-backed companies

GPs are managing materially larger portfolios and holding assets longer than ever before. With exit markets constrained, GPs are pursuing a broad range of alternatives to exit assets, generate liquidity and raise mid-fund life capital for trophy portfolio companies. 

As the market landscape continues to evolve, direct secondaries in particular are becoming an ever-more prominent landmark as GPs explore a growing range of GP-led secondary deal structures and opportunities. According to Bain & Company, minority stakes deals totalled $116 billion in 2024, representing a quarter of all exits. By comparison, the LP-led market was about $70 billion while GP-led deals totalled between $65 billion and $75 billion. While the secondaries marketplace, overall, continues to deepen, GP solutions are providing a key liquidity function to GPs keen to maintain majority ownership of portfolio companies and who would prefer not to embark on the formation of a continuation fund; which are certainly useful under the right circumstances, yet difficult to finalise. 

In recent years, the cadence of orderly exits has slowed. This is unlikely to be a temporary glitch in the system but a permanent structural shift in the private equity industry, as many more companies continue to stay private for longer time periods. Consequently, the need for interim liquidity to support further expansion growth within their buyout portfolios, and support fund performance, is likely to ratchet higher and drive demand for GP solutions secondaries.

David Wachter is the founding partner and CEO of W Capital Partners. The firm was established in 2001 to provide a range of liquidity solutions to GP sponsors and has pioneered the use of direct secondaries.   Two years ago, W Capital was acquired by AXA Investment Managers, underscoring the strength of conviction the French asset manager has on the importance of secondary markets.     

“When I started W Capital 20 years ago, there were 5,000 private equity backed companies and a thousand exits a year, of which roughly 100 to 200 were IPOs and the rest were M&A exits,” says Wachter. “Today there are 29,000 private equity backed companies worth close to $4 trillion and 1,500 exits a year. A 10-year old fund made sense when there were 5,000 companies and a thousand exits a year. Now you have a 20-year overhang of assets. Is that a problem? We don't think it is. The industry simply needs more interim liquidity.” 

This is borne out by Preqin data, which reveals that the average 2018 vintage North American private equity fund had Remaining Value to Paid in Capital (RVPI) of 1.09x at the end of last year. A decade ago, the average RVPI for a 2008 vintage fund, after six years, was 0.85x. That’s a 28% increase in unrealised NAV. Moreover, buyout funds are getting stretched by having to hold on to companies for longer. Using the same data range, one finds that the level of dry powder has shrunk markedly. Ten years ago, the average fund had called 89.5% of LP capital six years in to its investment cycle. Today, that figure is 98.7%, leaving a fraction of remaining dry powder to support companies.

“The analogy we use is the children are living at home longer than originally expected and they've eaten all the food in the fridge. Direct secondaries are a way to put more food in the fridge,” says Wachter. “Within the portfolio, GPs are assessing how to grow companies and exit them to create value for their LPs. They could do a continuation fund, but continuation funds are a very specific solution for a very specific type of problem. We try to find the right solution to the GP’s capital needs, whether it’s a CV, direct secondary or mid-life co-investment capital.”

“Direct secondaries are an elegant and easy to use part of the secondary ecosystem. They allow the GP to sell a minority position in a company to another buyer who wants to participate in that company’s journey without taking control. We give them an opportunity to receive partial liquidity while we get a shorter duration, lower risk investment in a quality company the GP wants to keep a few more years.”

Many of the world’s top PE groups are now exploring these liquidity alternatives. By partnering with strategic investors, which may also include SWFs, but less so other buyout sponsors, GPs have the potential to deliver a win/win/win outcome: to themselves (by maintaining ownership of the asset), to their existing LPs and to the new equity stakeholder(s) (provided that additional value creation is actually realised). 

Investors considering direct secondaries prioritise top tier GPs who they trust and have an existing relationship with. Asset quality is also important. Investors like W Capital look for mature assets that do not require venture-type financing or have working capital needs. 

“We like expansion capital to grow the business, not to fund losses,” asserts Wachter.

Another reason for asset overhang and running out of food to feed the children (a symptom of fast deployment, slow realisations), is the glacial movement of the IPO market in recent years. There are signs, however, that demand is improving. Global IPO proceeds rose to $61.4 billion in H125; a 17% increase compared to H124. Also, M&A activity is starting to pick up, with deal values increasing during the first six months of 2025 compared to the same period last year.

In a typical buyout-to-IPO scenario, the GP that owns nearly all of the company prior to the IPO, can end up with too much public stock which puts overhang pressure on the public company’s float and liquidity. This can result in a less optimized share price and share trading. Suppose a buyout firm owns a company with a $10 billion enterprise value. When the company lists, the GP may still hold $8 billion of stock. That creates a problem: they can’t sell down immediately without spooking the market. The GP is effectively locked in, exposed to market volatility and potentially weaker stock value.

A direct secondary, in some situations is referred to as a “private IPO,” which addresses this by allowing the GP to reduce its concentrated position ahead of time. 

Such deals are complementary to GP-leds, both of which inhabit the GP solutions ecosystem. And while GP-leds have plenty of merits, in their own right, investors have to be careful that the GP’s motivations really are strategic and not a short-term fix. The rationale for any continuation vehicle is always the same: to hold on to trophy assets longer.

“The immediate question this raises is, ‘Why aren't you keeping the trophy asset longer inside the flagship fund, benefiting your LPs who have given you blind pool committed capital and expect you to grow those assets as much as possible?’” notes Wachter.

If the reason is to do a massive M&A deal and the GP expects to keep the company at least five years, that's a fair reason. The motivation is clear.

“However, if it is to create DPI for their LPs, that's not a good reason because in that case they could consider a direct secondary or use a NAV loan. CVs make sense in certain circumstances but for the vast majority of these deals, a strip sale is more logical; that's why 75% of our deals are direct secondaries,” concludes Wachter.