• Sales of positions in decade-old funds rising, 40 Act funds are prominent buyers
• Some investors continue to hold older positions despite performance drag issues
• LPs no longer so worried about secondary deals spoiling relationships with GPs

Limited partners (LPs) are increasingly reaching into the past in the pursuit of liquidity from their private equity portfolios. Positions in funds at least a decade old – legacy assets, often with limited remaining value, usually left to expire slowly in the background – have been put on the market for secondary investors to consider.

The swell in deal flow involving so-called tail-end funds is indicative of the challenges created by an environment of constrained exits. In the absence of distributions, investors are manufacturing liquidity by offloading longer-dated exposure that is beginning to weigh heavily on returns.

“We’ve seen significant increases in volume in our particular space, just given these macro factors and dynamics,” said Mike Catts, a partner at Hollyport Capital, which specializes in purchasing legacy assets in the secondaries market.

LP-led secondary transaction volume rose 40% year-on-year to USD 56bn in 1H25, according to Jefferies. Average pricing on these transactions came in at 94% of net asset value (NAV), in line with 2024, representing the highest levels seen since 2021. Tail-end vintages, however, don’t enjoy such pricing power. Jefferies observed that they trade at anywhere between 55% to 75% of NAV.

Market participants attest that evergreen 40 Act funds are currently the most active buyers of tail-end assets. These funds bid aggressively on all assets, with Campbell Lutyens noting that they are bidding 91.1% of NAV compared to an industry average of 86.7%. Even underperforming assets, which may include tail-end portfolios, are said to be trading at 70% to 80% of NAV.

To some extent, it is a perfect match. 40 Act funds need to deploy quickly, so the expectation of near-term liquidity from very mature portfolios is appealing, secondaries bankers told Mergermarket.

“The whole premise with LP-leds in 40 Act funds is often to buy the assets and recycle capital, if possible, but you have with little control and are betting they liquidate soon. The problem is, you’re often paying full freight for that optionality,” said Chris Lawrence, a managing partner at Labyrinth Capital Partners.

However, there are suspicions that a recent slowdown in buying means these investors have already maxed out their 2025 budgets. The likes of Hollyport are happy to step into the void.

“They have been active in the tail-end space, but the 40 Acts have been less active [recently] because they deployed so much in the first half of the year and have already completed the acquisitions [in tail-end] that they wanted to do,” explained Catts.

Opportunity cost

Even in a robust secondaries market, many LPs find themselves holding onto tail-end assets far past their prime. This stems in part from a reluctance to take a haircut on portfolios, regardless of whether it means retaining largely moribund positions.

But this is not without consequence. A recent study by Upwelling Capital, based on analysis of 1,199 US buyout funds over a two-decade timeline, found that the opportunity cost of failing to cash out could be significant. LPs should not expect positive returns from tail-end funds, especially those in the bottom quartile, so it would be better to redeploy the capital into higher performing investments.

“[With bottom decile funds] you’re losing returns after year five or six,” said Eric Green, a partner at Upwelling and one of the study’s authors. “If you’re trying to achieve a 10% return and you have something that is declining 3-4% a year, even if it’s only 10% of your portfolio, it’s still dragging you away from total return potential.”

Indeed, selling an reinvesting the proceeds delivers a higher return than holding on when the discount is as much as 40%, the study found.

According to Upwelling, the negative impact of failing to sell will intensify as tail-end portfolios continue to grow. It recommends LPs identify underperforming funds early – by tracking the trajectory of total value to paid-in (TVPI), which normally peaks at the end of year five – and consider more systematic selling of funds within the first 8-10 years, even if this means taking a larger-than-normal discount.

“Owners of private equity recognize that their tail-end funds that are 10-plus years old tend to go sideways or down in value, so there’s an optimal time to sell if you think you can redeploy the capital to assets that will grow more quickly,” added Hollyport’s Catts.

Nevertheless, some LPs still prefer to hold rather than pursue a secondary sale process. To Ashley Kahn, a senior vice president with Callan’s Alternative Consulting group, it is often a resource issue: whether the desire to clean up the portfolio or reduce administration justifies the cost of a process.

“Sometimes it’s just easier and more efficient to keep them on the books,” she said.

Two LPs endorsed this stance. First, tail-end funds can still generate good revenue even if NAV has diminished over time, they said. Second, running a sale process for a single fund position is simply too costly and too time consuming.

Then there is the fear of giving away too much. A transaction comprising only underperforming fund positions would trade at a deep discount, and this might mean writing off the value in one or two strong portfolio companies in the bigger bundle. A mixed-bag portfolio of different vintages and quality often makes the most sense from a pricing perspective to free up liquidity, one of the LPs said.

Ultimately, deciding whether to sell comes down to the liquidity preferences of any individual LP, not the size of a particular holding within a fund, according to Ryan Lennie, a managing director in Wilshire Associates’ outsourced CIO solutions team.

“At that level, it’s not going to move the needle on the total portfolio return one way or another, so it just makes sense to take the liquidity option and move onto other investments,” said Lennie.

Better planning

While Upwelling advocates proactive selling of tail-end funds, it is a solution after the fact. LPs might also want to address the root cause of performance drag – general partners (GPs) holding assets for too long.

In this context, tail-end funds are a byproduct of weak portfolio management at the GP level. Sponsors have sold opportunistically, focusing on the strongest assets and delaying the realization of sub-optimal outcomes on poorly performing investments.

This has been compounded by a lack of coordinated exit planning by GPs as individual partners look to preserve their own track records. Border to Coast, a UK pension investor, has called on managers to go against the grain and execute disciplined, timely exits to prioritize fund internal rate of return (IRR) rather than deal IRR.

Some private equity firms have already introduced exit committees to hold deal teams accountable and create a more systematized approach to liquidity. A shift from “partner-first” to “fund-first” reduces the risk of being stuck with residual assets for extended periods. As approaches to portfolio management improve, the prevalence of large tail-end pools should diminish, a third LP said.

Attitudes towards secondary sales are also evolving.

Typically, transactions are conditional on getting sign-off from the manager of every underlying fund involved. The process is not only time-consuming, but LPs are wary of poisoning relationships with GPs – to the point that regular sellers might not be solicited for future fundraises. It has led many LPs to consider alternative sources of liquidity.

However, after years of low distributions and amid challenging conditions for fundraising, the balance of power has swung towards LPs. Fundraising negotiations not only focus on fee discounts for those coming in early or at scale, but on fee breaks when managers struggling to deliver exits seek fund life extensions. This is one of a list of protections now being pursued.

Sasha Burstein, a partner at K&L Gates, observed that sensitivities have evolved from just protecting the relationship to achieving better economics through provisions like deferred carried interest, tiered waterfalls, and revenue-sharing arrangements.

“Today, the stigma around secondaries or LP stake sales has diminished significantly,” said Burstein. “Structures such as bespoke pricing, co-investment rights, and risk-sharing mechanisms are being used not just to secure commitments but to foster GP-LP alignment.”

The penalty for failing to compromise could be severe.

“Anyone looking at a new fund is going to ask how many old LPs re-upped, and if you do not get prominent LPs doing so, that’s obviously making life a lot harder for raising a new fund,” said Green from Upwelling.