In secondary markets, strategy is now as critical as liquidity. While LP-led transactions enable portfolio rebalancing, GP-led deals allow for the maximisation of "winners" across Private Equity (PE), Venture Capital (VC), and Private Debt. Navigating the "Roll vs Sell" dilemma and potential conflicts of interest requires absolute precision.
The Rise of the Secondary Market: A New Liquidity Paradigm
The secondary market is no longer a fallback option but a structural response to the drying up of primary market exits. Facing a slowdown in Initial Public Offerings (IPOs) and Mergers and Acquisitions (M&A), General Partners (GP) and Limited Partners (LP) are confronting unprecedentedly long holding cycles. This scarcity of traditional distributions has transformed the secondary market into a vital engine for capital recycling.
In Private Equity, Venture Capital, and Private Debt, the ability to generate interim liquidity events has become a major competitive advantage for maintaining attractive performance metrics and reassuring institutional investors.
GP-led Strategies: Active Management by the General Partner
The Rise of Continuation Funds
GP-led transactions allow managers to retain their highest-performing assets beyond the original fund’s contractual life via a continuation fund. A distinction is made between single-asset and multi-asset continuation vehicles. By transferring an asset from a mature vehicle to a new fund, the GP avoids a rushed exit due to time constraints and continues to drive growth. This is a significant lever in Venture Capital for supporting scale-ups until optimal maturity—before an IPO, for instance—thereby protecting the long-term IRR.
The Roll vs Sell Dilemma: A Matter of Conviction
In a GP-led deal, the LP faces the "Roll vs Sell" choice. Choosing "Sell" allows for the immediate realisation of capital gains, often at a price close to Fair Value. Choosing "Roll" involves reinvesting in the new vehicle, frequently under modified economic terms (reduced management fees, new performance hurdles). This choice is particularly complex when the underlying asset features hybrid capital structures, blending equity and convertible debt, requiring a granular analysis of the data room provided by the GP.
Crystallisation and Conflict of Interest Management
A GP-led transaction often triggers the crystallisation of carried interest accrued in the initial fund, while realigning the management team's interests with the future performance of the continuation fund. To ensure fairness, these operations demand total transparency regarding the waterfall model and the acquisition of a Fairness Opinion. The objective is to demonstrate to exiting LPs that the transfer price has not been undervalued to the benefit of incoming LPs or the GP itself.
LP-led Strategies: Tactical Portfolio Management
Adjusting for the Denominator Effect and Uncalled Capital
Investor-initiated transactions (LP-led) primarily serve to rebalance asset allocations that have become overexposed to private markets. This phenomenon, often intensified by public market downturns, forces LPs to divest fund interests to comply with risk ratios. Beyond the simple sale of Net Asset Value (NAV), LP-led deals allow for the transfer of the obligation to honour future capital calls (Uncalled Capital). This reduces pressure on the LP’s balance sheet while crystallising a certain level of Multiple on Invested Capital (MOIC).
Maturity Arbitrage and Private Debt
In the private debt space, the LP-led route is a powerful tool for managing portfolio longevity. An LP may choose to sell senior or mezzanine debt positions—sometimes including capitalised PIK interest—to anticipate a rate hike cycle or sector-specific credit risk. Secondary buyers, often possessing specific restructuring expertise, take over the claims and associated collateral at a discount that reflects the present value of future cash flows.
"Seasoned" Portfolio Sales
LP-led transactions often involve "seasoned" (mature) portfolios, where the investment phase has concluded and exit visibility is at its peak. For the seller, this is an opportunity to exit fragmented lines and focus on new strategies. For the buyer, it is a way to mitigate the "J-curve" by entering funds that are already generating Distributed to Paid-In (DPI) returns.
Comparative Analysis: Pricing, Risk, and Complexity
Pricing Dynamics: Discount vs Fair Value
The primary distinction lies in price formation. A GP-led transaction targets Fair Value: as the operation is an internal transfer, the price must be validated by market benchmarks and recent comparable transactions to protect the manager’s fiduciary integrity. Conversely, in an LP-led sale, the seller generally accepts a discount to the last reported NAV to obtain immediate liquidity (a buyer's market).
Operational and Structural Complexity
The GP-led deal is a precision engineering exercise that redefines economic rights. In Private Equity, these operations often involve a complex restructuring of liabilities and a realignment of Management Incentive Plans (MIPs), which are essential for securing operational continuity during the transfer to a new vehicle. In Private Debt, this entails analysing the impact of the transfer on bank covenants and debt seniority. For VC funds, it requires a reassessment of liquidation preference clauses that may be modified during the transition to the continuation fund.
In contrast, the LP-led transaction is a relatively standardised sale of interests. It is a primarily contractual process focused on the transfer of ownership and future commitments, without altering the governance structure or operational agreements of the underlying assets.
From Data to Decisions: The ScaleX Invest Approach
The complexity of secondary transactions necessitates a shift from intuitive evaluation to analytical rigour. Trust between GPs and LPs rests on the ability to justify a transfer price with empirical data.
The ScaleX Invest solution addresses this challenge through an independent and IPEV-compliant valuation approach. Our Portfolio Monitoring tools enable:
- Independent Valuation: The application of multi-criteria methods (DCF, comparables) establishes an objective and defensible NAV.
- Dynamic Monitoring: Real-time tracking of financial KPIs provides an accurate view of performance prior to any transaction.
- Transparency and Audit: The platform generates a comprehensive audit trail, facilitating the validation of operations by LPs and regulators.
FAQ
What is the difference between LP-led and GP-led?
LP-led is a sale of fund interests initiated by the investor to obtain liquidity. GP-led is a transaction orchestrated by the manager (e.g., continuation fund) to extend the holding of high-performing assets.
How does pricing differ between the two?
LP-led usually incurs a discount to NAV to compensate for illiquidity. GP-led is executed at Fair Value, validated by an independent valuation to ensure equity between exiting and incoming LPs.
Why is GP-led complex in terms of governance ?
Since the GP acts as both buyer and seller, the operation generates conflicts of interest. It requires LPAC approval and a rigorous update of the waterfall model to reflect new economic rights.
What is the impact on performance calculation ?
These transactions allow for the crystallisation of MOIC and transform paper gains into real distributions (DPI), while providing a new cycle of value creation for the transferred assets.
How does ScaleX Invest secure these operations ?
ScaleX provides independent, IPEV-compliant valuations that serve as an objective basis for the transfer price. The platform centralises data to offer a complete audit trail for both managers and investors.
