“There are 19,000 private equity funds in the US. There are 14,000 McDonald’s locations in the US. How are there more private equity funds than McDonald’s?”
- Joe Bae, Co-CEO, KKR & Co. November 4, 2025
The secondary market for private funds is on a tear. During the first half of 2025, global secondary market transaction volume reached $103 billion, a 51% increase from $68 billion in H1 2024, setting a new record for any six-month period. Full-year 2025 transaction volume is projected to exceed $210 billion.1
This extraordinary growth is fueled by several supply and demand factors, such as:
- A stagnant mergers and acquisitions (M&A) and initial public offering (IPO) environment has slowed traditional exit routes for private companies and reduced liquidity for investors, which has created a significant pool of willing sellers.
- Robust capital raising for secondary strategies, particularly evergreen structures, requires rapid capital deployment.
- Beyond serving as a liquidity outlet, the secondary market has become a viable and important portfolio construction and management tool, with both Limited Partners and General Partners using it systematically.
For allocators, secondary markets play an important role in the private markets ecosystem and provide several important benefits, including:
Investor Control
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- Sellers can control the timing of transactions to better match investors’ return objectives and investment horizon, offering liquidity in an otherwise illiquid asset class.
- Buyers can build targeted exposures in a more granular manner, including industry, strategy, geography and vintage, to tailor portfolios and achieve desired outcomes. |
Risk Mitigation
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- Buyers can make more informed investment decisions, as they have the ability to access more mature and stable portfolio companies with greater visibility and reduced "blind pool" risk.
- This can reduce execution and adverse selection risk, and offer greater clarity on valuation and performance potential.
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Higher Return Potential
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- Buyers can shorten the investment cycle and mitigate the “J-curve” effect, as allocations are made into more mature assets, enabling investors to potentially realize returns more quickly.
- Acquiring assets at discounts to net asset value (NAV) can enhance overall returns. |
This flexibility does not come without cost for sellers—secondary transactions typically occur at prices discounted to the seller's most recently reported NAV and can range from 5% to 25% or more, depending on the asset’s vintage (year of initial investment) and other characteristics.
Rule ASC 820
There is an important and poorly understood characteristic of secondary fund returns, particularly for semi-liquid evergreen funds, which may distort a full understanding of these returns.
Under ASC 820, investment funds must report their portfolio investments at “fair value,” defined as the exit price in an orderly transaction, not the entry price or actual transaction cost. For private fund interests that are acquired at a discount (e.g., buying LP stakes at 75 cents on the dollar), the fund re-values the position at NAV (if that is deemed the best estimate of fair value) on the reporting date, immediately marking up the asset. Auditors and fund accountants accept this practice as a “practical expedient”—provided that the NAV is established fairly and there is sufficient evidence supporting its accuracy and liquidity conditions.
The Math of Secondary Returns and the Impact of Fund Cash Flows
As we highlighted earlier this year, evergreen fund launch activity has been robust in response to investor demand for private markets access. PitchBook estimates that evergreen fund assets could grow from the current $400M to $1.1T by 2029.2 With this growth, evergreen funds are likely to play an increasingly important role in the private markets secondary ecosystem.
The return implications from the application of ASC 820 and evergreen funds can be significant, especially for newer (<3 year track record) funds with significant inflows of fresh capital. For a younger secondary evergreen fund, the bulk of fund assets will be fresh capital inflows, which are then put to work buying secondary interests.
Often, these transactions occur at attractive discounts, potentially in the range of 15% to 25%. Per ASC 820, these positions, even when acquired at a discount, must be “mark-to-market”; for example, a 20% discount that is marked to the “market” NAV can provide an instant 25% gain for the portfolio of acquired assets.
Early in a fund’s life, when the percentage of fund assets is dominated by fresh capital inflows, the reported returns for the fund can be extraordinary, as the fund captures both discount mark-ups and NAV growth in reported returns.
Over time, as a fund grows, the percentage of new fund flows relative to the existing asset base will likely fall significantly. As the asset mix shifts from fresh capital inflows to legacy fund assets, the impact of strong early returns from discount markups will fade, and fund returns will more closely follow the more modest NAV growth of the underlying fund interests.
Portfolio turnover can provide fresh capital from both asset sales and realizations, but estimating cash flows is dependent upon the average holding period. Early in the life of these funds, holding periods and portfolio turnover are unknown. Also unknown are the discounts the fund incurs when initiating an asset sale.
Summary
Access to secondary markets can add significant value to portfolios and broader private market allocations. However, it is essential for investors to understand both the drivers of secondary fund returns and the ongoing influence of fund flows on reported performance.
The impact of ASC 820 and fund cash flows on secondary fund returns is fundamentally mathematical. Younger secondary funds that receive substantial capital inflows may initially report exceptional returns, driven primarily by the immediate mark-to-market uplift from acquiring interests at a discount. There is some likelihood that as funds mature and new cash inflows and portfolio turnover represent a smaller share of the total asset base, fund performance will likely converge toward the more modest net asset value (NAV) growth of the underlying portfolio postions.
Will secondary managers continue to put up strong performance? Will the secondary market continue to both broaden and deepen? Will attractive discounts for secondary interests persist? Will new funds continue to attract strong inflows? Will secondary fund managers actively manage portfolio postions and turnover to create cash positions to capture new discounted opportunities?
By factoring these considerations into research and due diligence, investors can better position their portfolios and establish more realistic expectations for the range of possible long-term outcomes.
Important Disclosures & Definitions
1 Jeffries LLC (July 2025). Private Capital Advisory, H1 2025 Global Secondary Market Review. Jefferies.com.
2 Sanders, D. (May 1, 2025). 2029 Private Market Horizons, Forecasting the growth of private capital AUM over the next five years. Pitchbook.
ASC 820: an accounting standard that provides a framework for defining, measuring and reporting the fair value of investments. By standardizing how fair value is measured and disclosed, ASC 820 ensures financial statements provide stakeholders, investors, regulators and decision-makers with reliable details about a company’s assets, financial liabilities and equity.
Mark-to-Market (MTM): a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.
AAI001039 12/02/2026
