Private Equity Secondaries: Adapting to Illiquidity and Risk

Legal Considerations

1. Due Diligence and Negotiation 

Generally, there is increased transparency around the underlying portfolios in secondary transactions when compared to traditional buyout funds; however, due diligence may still be required as part of the negotiation process to customize deal terms or for independent valuations. Customization of deal terms appears to be more prevalent in single-asset transactions and for investors with sufficient capital and capabilities to position themselves as lead investors.  

Parties will also want to be mindful of the potential conflicts of interest among GPs, rolling LPs, selling LPs and new investors. Particularly in GP-led continuation vehicles, sponsors and GPs will need to be mindful that they are selling trophy assets to themselves and of the heightened need for assets to be priced fairly. 

2. Documentation and Regulation

Typical legal documents that may need to be prepared include a purchase and sale agreement, subscription documents, a limited partnership agreement or trust indenture, joinders, side letters and legal opinions. Pursuant to the Securities Exchange and Commission (SEC) Private Fund Advisor Rule (US), private fund managers managing funds in the US would have also been required to obtain an independent fairness opinion prior to any GP-led secondary transaction; however, the rules were struck down by the US Court of Appeals for the Fifth Circuit (Bennett Jones wrote on this development here).  Even so, it has highlighted the increasing regulatory interest in the private funds industry and certain LPs may still expect that standard. 

Market Outlook In 2025

New tariffs, evolving geopolitical relations, uncertainty around interest rates and volatile public markets have all contributed to increasing macroeconomic uncertainty in Q1 2025. Despite this, general consensus and Q1 2025 reports suggest that secondaries transaction volume remains high and is expected to increase in 2025.¹⁰

We may see an increase in due diligence and tailored deal terms as investors seek better returns despite the macroeconomic uncertainty, leading to longer transaction timelines. Volatility in public markets may also lead to valuation challenges since PE secondaries are priced based on a percentage of the reported NAV, which is typically reported quarterly. Demand for resilient asset classes, such as private credit and infrastructure secondaries, as well as tariff-resilient portfolio companies, is expected to continue.

Key Takeaways

• The momentum in secondaries should continue: Both GP-led and LP-led secondary transaction volume is expected to rise in 2025, with a projected aggregate volume of US$185 billion, according to Jefferies. The downturn in PE deals and exits should continue to drive this momentum.
• The benefits of the secondary market are sought–after: Private market secondaries and secondaries funds can provide benefits to LPs, GPs and retail investors alike including, early liquidity, reduction of risk and access to mature, high-performing assets, setting the stage for increasing demand. 
• Due diligence: Before closing on a secondaries transaction, parties will want to consider various legal matters including conflicts of interest, due diligence and negotiation of key documents.
• Look for new secondaries growth in other areas: New PitchBook research show that the market for venture capital direct secondary transactions in the US is swelling. Reuters recently reported that private credit secondary sales are set to rise as market turmoil spurs the hunt for cash.

To discuss opportunities and developments in private equity secondaries, please contact one of the authors.

Bennett Jones Private Equity & Investment Funds Group

The Bennett Jones Private Equity and Investment Funds group is a leader in Canada. Our clients include sophisticated financial sponsors who are looking to balance risk with expected return and who require tailored advice from the initiation of the investment phase through to exit. Bennett Jones represents all sides in private equity transactions, with particular depth on behalf of the United States and domestic financial sponsors.