GP-Led vs. LP-Led Transactions: Understanding Secondary Transactions in Private Equity

According to leading secondary market studies, GP-led transactions now account for a significant share of global secondary private equity transaction volume. This trend illustrates the profound transformation of a market that was long dominated solely by investor-initiated divestitures.

Behind the terms “GP-led” and “LP-led” lie two distinct mechanisms that address different needs within the private equity ecosystem. LP-led transactions primarily allow investors to manage their liquidity or asset allocations, while GP-led transactions offer management firms greater flexibility in supporting the companies in their portfolios.

Understanding these two approaches has become essential to grasping how the secondary private equity market works, the reasons behind its growth, and the innovations that are shaping private markets today.

This article is intended solely for educational and informational purposes. It does not constitute investment advice, an investment recommendation, or an offer to subscribe to a financial product.

What is a secondary transaction in private equity?

The secondary market for private equity refers to all transactions that allow for the transfer of an interest in a private equity fund before its natural maturity.

Traditionally, private equity investments are made with a long-term horizon that can exceed ten years. During this period, investors have few opportunities to divest their stakes. The secondary market has gradually emerged to address this need by creating a liquidity mechanism within an asset class that has historically been illiquid.

Today, the secondary market is a segment in its own right within the private equity industry and plays an important role in the overall efficiency of private markets.

Why has the secondary market grown?

The growth of the secondary market goes hand in hand with that of private equity. As assets under management increase, investors have a greater need for solutions that allow them to adjust their asset allocations, manage their liquidity constraints, or rebalance their portfolios.

This development is part of the industry's gradual maturation. What was once considered a relatively static asset class now features mechanisms that offer greater flexibility to investors and asset management firms.

Who are the main players in the secondary market?

The secondary market brings together several categories of participants. Sellers are primarily institutional investors such as pension funds, insurance companies, sovereign wealth funds, and family offices. Buyers are generally funds specializing in secondary strategies or investors with in-depth expertise in private markets.

These participants help facilitate trading and improve market efficiency.

What is an LP-led transaction?

An LP-led transaction is a secondary transaction initiated by an investor, known as a Limited Partner (LP).

In this type of transaction, an investor decides to sell its stake in a private equity fund to a buyer in the secondary market. The transaction involves the stake in the fund itself and not, directly, the companies held by the fund.

Historically, LP-led transactions have formed the foundation of the secondary market and represent the most traditional form of secondary trading.

How does an LP-led transaction work?

When an investor wishes to sell a stake, an analysis process is initiated to evaluate the underlying portfolio as well as the remaining investment commitments. Potential buyers then conduct their due diligence before making an offer.

Once the transaction is completed, the buyer assumes the rights and obligations associated with the fund interest.

Why would an investor sell their stake?

There can be many reasons for doing so. Some investors seek to generate liquidity, while others want to rebalance their portfolios or reduce their exposure to certain strategies.

In many cases, these transactions reflect a portfolio management decision rather than an assessment of the quality of the fund in question.

What are the advantages and limitations of LP-led transactions?

LP-led transactions provide greater flexibility in managing allocations. They also help improve overall liquidity in the secondary market and promote more active portfolio management.

However, the existence of a secondary market does not guarantee the ability to sell a stake at any time or under all market conditions. Available liquidity may vary depending on the economic environment, the quality of the assets in question, and buyer interest.

What is a GP-led transaction?

Unlike LP-led transactions, GP-led transactions are initiated by the fund’s management company, known as the General Partner or GP.

The goal is generally to propose a new holding structure for one or more assets whose growth potential is still considered significant.

This category of transactions is currently one of the most dynamic segments of the secondary market.

However, the growth of GP-led transactions does not imply that they are appropriate in all situations or that the assets in question will perform well in the future. Each transaction has specific characteristics that must be analyzed on a case-by-case basis.

How does a GP-led transaction work?

When a fund nears the end of its life cycle, some companies in the portfolio may still offer significant growth potential.

Rather than immediately divesting these assets, the management company may decide to transfer them to a new investment vehicle. Existing investors then have the option to sell their stake or remain invested in this new structure.

This approach allows for greater flexibility in managing detention cycles.

What is a continuation fund?

A continuation fund is the most commonly used structure in GP-led transactions.

Its objective is to extend the holding period for one or more assets when the management company believes that the potential for growth or transformation has not yet been fully realized.

Rollover funds offer investors several options depending on their circumstances and objectives. However, implementing them requires a thorough analysis of the terms of the transaction, the proposed governance structure, and the characteristics of the assets involved.

How are conflicts of interest managed in GP-led transactions?

GP-led transactions require particular attention to governance issues. This is because the management company is organizing a transaction involving assets that it already manages.

To protect investors’ interests, these transactions are generally accompanied by specific procedures, which may include independent valuations, competitive processes, opinions from specialized third parties, or approval mechanisms set forth in the fund documentation.

Governance is therefore a key element in the analysis of this type of transaction.

Why are GP-led transactions experiencing strong growth?

The growth in GP-led transactions reflects several structural trends in the private equity market.

On the one hand, asset management firms are supporting companies over time horizons that are sometimes longer than before. On the other hand, investors are seeking greater flexibility in their asset allocation and liquidity choices.

Finally, the growth of follow-on funds has helped make this type of transaction more widespread within the industry.

GP-led vs. LP-led: What Are the Differences?

Although these two mechanisms are part of the secondary market, they serve distinct purposes.

Why are these two mechanisms complementary?

LP-led and GP-led transactions address different but complementary issues.

The former allow investors to manage their asset allocations more actively. The latter offer greater flexibility to investment management firms when they wish to continue supporting companies that still have growth potential.

Together, they help make the private equity market more efficient, more flexible, and better suited to the needs of the various players in the ecosystem.

Why do GP-led transactions account for a growing share of the secondary market?

The rise of GP-led transactions has been one of the most significant developments in the private equity secondary market in recent years. Long dominated by LP-led transactions, the secondary market has gradually evolved to meet the new needs expressed by asset management firms and investors.

This development is not merely a passing fad. It is part of a broader trend toward the maturation of private markets and the increasing sophistication of investment strategies.

The Maturation of Private Equity

Private equity has experienced spectacular growth over the past two decades. The amounts invested, the number of companies financed, and assets under management have all risen sharply.

As the industry has grown, investors’ needs have evolved. The solutions that were historically available no longer always met the challenges faced by large institutional investors or Fund manager increasingly large Fund manager .

GP-led transactions are one of the responses to this market trend.

Investors' Search for Flexibility

Institutional investors today are seeking greater flexibility in managing their portfolios.

When a fund nears the end of its life cycle, not all investors necessarily share the same objectives. Some wish to recover their capital and reallocate their resources to new opportunities. Others prefer to maintain their exposure to certain companies whose growth prospects remain favorable.

GP-led structures are specifically designed to address this diversity of needs by offering several options to the investors involved.

The Lengthening of Value Creation Cycles

In many sectors, companies' operational transformation is now taking place over longer time frames.

Digital transformation, international expansion, and external growth strategies sometimes take longer than expected to yield results.

In this context, follow-on funds enable management companies to continue supporting businesses when they believe that their development plans have not yet reached maturity.

What role do secondary transactions play in the private equity ecosystem?

The secondary market has become an essential part of how private markets operate.

Beyond simply connecting buyers and sellers, it helps improve the flow of investments and the flexibility of the entire ecosystem.

A Solution to Liquidity Needs

One of the primary functions of the secondary market is to provide investors with a complementary liquidity management solution.

In an asset class characterized by long-term investment horizons, the ability to sell a holding before the fund matures is a particularly useful management tool.

It should be noted, however, that liquidity in the secondary market depends on market conditions, the quality of the assets in question, and the presence of interested buyers. It cannot be considered guaranteed.

A more efficient market for investors

Secondary transactions also facilitate greater capital flow within the private equity industry.

Investors can adjust their asset allocations more easily, while specialized buyers gain access to pre-built portfolios.

This flexibility contributes to the development and professionalization of the market.

An asset class that has become more flexible

The growth of the secondary market illustrates private equity's ability to adapt to meet investors' expectations.

LP-led and GP-led transactions now offer more opportunities than ever before, for both investors and management firms.

This development is contributing to the gradual maturation of the private markets ecosystem.

Key Takeaways on GP-Led and LP-Led Transactions

GP-led and LP-led transactions are now two essential components of the private equity secondary market.

LP-led transactions primarily address investors’ needs for liquidity or portfolio reallocation. GP-led transactions, on the other hand, enable management companies to offer tailored solutions when they wish to extend their holdings of certain assets.

The development of these mechanisms reflects the growing sophistication of the secondary market and the maturation of the private equity industry as a whole.

Understanding how they work provides a better insight into the trends that are currently shaping the global private equity ecosystem.

Like any transaction carried out on private markets, secondary transactions have characteristics, constraints, and risks that must be analyzed in light of each investor’s specific objectives and circumstances.

FAQ on GP-led and LP-led Transactions

What is the difference between a GP-led transaction and an LP-led transaction?

An LP-led transaction is initiated by an investor seeking to divest its stake in a fund. A GP-led transaction is initiated by the management company to propose a new ownership structure for one or more assets.

What is a continuation fund?

A follow-on fund is an investment vehicle used in the context of a GP-led transaction. It allows for the continued holding of one or more assets when the management company believes that their growth potential has not yet been fully realized.

Why are GP-led transactions on the rise?

Their growth is linked in particular to the maturation of the private equity sector, the lengthening of corporate development cycles, and institutional investors' search for flexibility.

Who invests in secondary transactions?

The main investors are funds specializing in the secondary market, pension funds, insurance companies, sovereign wealth funds, and certain family offices.

Can individual investors access the secondary market?

Direct access to the secondary market remains primarily limited to professional investors. However, certain investment solutions may offer indirect exposure to secondary strategies, subject to the eligibility requirements applicable to each investment vehicle.

Do secondary transactions affect the level of risk associated with an investment?

Each transaction has its own specific characteristics. The level of risk depends, in particular, on the quality of the underlying assets, market conditions, the structure of the transaction, and the investment horizon under consideration.

Important Information

The information presented in this article is provided solely for informational and educational purposes. It does not constitute investment advice, an investment recommendation, or an offer to subscribe to or purchase any financial instrument.

All investments involve risks, including the risk of capital loss, liquidity risk, and market risk. Past performance is not indicative of future results.