Written by Benedetto Emanuele, Adrian Tsonev and Giorgia Verdun
As IPO activity has stalled and secondary buyouts have slowed down, exit opportunities have diminished. This has led to longer fund liquidation periods, which has intensified liquidity pressure from LPs on fund managers. In response, the private equity secondary market is facing a structural shift: driven by increasing constraints in traditional exit channels, LP-led transactions are increasingly being replaced by GP-led transactions. Driven by necessity, GP-led solutions have emerged as a key mechanism to overcome these constraints.
To better understand why these transactions have grown so rapidly, it is crucial to first examine how LP-led secondaries work.
Limited partnerships (LPs) are a business structure where at least two partners own the company, but only one of them actually manages the business. The party that isn’t involved in running the business is called a limited partner, since they contribute capital but don’t actually take part in running the fund. Their risk is limited to the amount they invest. On the other hand, the GP manages everything more specifically, choosing investments. This setup lets investors stay passive while still getting access to complex deals they couldn’t do alone.
LPs became increasingly utilized from the 1980s through the early 2000s. During this time, private markets were expanding quickly as a result of a volatile public market, and large institutional investors like pension funds, insurance companies, and university endowments were looking for better returns than what public markets were offering. LP-GP structures worked well because they provided strong management and a clear incentive system. GPs earn management fees and also a share of the profits, which pushes them to perform well. At the same time, LPs don’t have to deal with day-to-day decisions and strictly have to provide capital.
Concerning key features of LPs, they usually have long lifespans, often around 7 to 10 years, since investments take time to grow and exit due to the long-term and illiquid nature of these investments. When investing in private markets, it is very illiquid, meaning investors can’t easily withdraw their money once it’s committed unless traded on the secondary market. Another important feature is the distribution structure, where LPs typically get their initial investment back before profits are shared with the GP, which creates somewhat of a sense of protection for investors.
While LP-led secondaries focus on investors, GP-led secondaries shift attention to fund managers, making it essential to understand the role of General Partners in private equity today.
Understanding GP’s-led secondaries
A GP-led secondary occurs when the initiator of the sale process is the General Partner, that is, the fund manager. These transactions generally involve the restructuring of an existing fund or the transfer of an asset into a continuation vehicle to extend its holding period.
In this configuration, Limited Partners are offered the option either to sell or to roll over their shares from the existing fund into the continuation fund. The complexity of these transactions is higher than that of classic LP-led secondaries due to the fund restructuring and the need to align the incentives of multiple parties.
They emerged from a divergence between the objectives of LPs and GPs. In recent years, macroeconomic events such as the COVID-19 pandemic and the war in Ukraine, followed by high inflation and rising interest rates, have slowed down exit activity. As a result, investments that would typically have been exited within 3–5 years could not be sold, as valuation multiples were not sufficiently attractive due to slower growth.
The idea is pretty straightforward and tries to align the different parties’ incentives: GPs are given an extended holding period for their assets, which allows them to continue growing the companies and achieve the hoped-for multiples, while LPs are given a liquidity option with the choice between liquidating their positions through a sale to new investors interested in entering the continuation funds or reinvesting in the new fund.
These transactions have attracted significant interest for several reasons. First, asset scarcity: managers prefer to retain their best-performing assets, which are often considered not yet to have reached their full potential, rather than sourcing new opportunities. Second, liquidity optionality: GP-led secondaries provide LPs with a clear choice between immediate liquidity and continued participation. Third, alignment of incentives: they allow GPs to reset their carried interest; moreover, a premature liquidation of the fund could reduce future management fees, which represent a key component of GP compensation in private equity.
A crucial feature in GP-led secondaries is the so-called “valuation scrutiny”. In fact, since the GP is effectively involved in both the selling and buying sides of the transaction, a third-party opinion is required to assess whether the selling price is fair to reduce risks for secondary investors.
A great example of GP-led secondaries was made by Vista Equity Partners in June 2025, as they closed a $5.6bn continuation fund to extend the ownership of Cloud Software Group.
The new vehicle fund attracted $2.7bn in new capital from secondary investors; moreover, an additional $2.2bn in commitments were raised from Vista’s existing Fund VII and VIII, while the difference was rolled over from Fund V.
This massive deal marked the growing adoption of continuation funds in the context of a sluggish M&A and IPO environment.
Outlining the peculiarities of both transaction structures was a prerequisite to describing the reasons behind this shift.
Why is the shift happening?
The rise of GP-led secondaries is largely a response to shifting macroeconomic conditions. Higher interest rates, persistent inflation and geopolitical uncertainty have disrupted traditional exit markets like IPOs and M&A activities. For example, Q1 2025 saw some of the lowest exit volumes since early 2023, and according to McKinsey research, last year’s average buyout holding period rose to 6.7 years from a two-decade average of 5.7 years with exit backlog now bigger than any point since 2005.
Low financing costs, which previously encouraged rapid fund transactions and steady exit opportunities, have risen significantly over the past five years due to central banks increasing interest rates to combat higher inflation rates alongside broader uncertainty. This shift has increased the cost of leverage, reducing buyers’ ability to finance acquisitions and, therefore, constrained deal activity. Furthermore, higher rates have also contributed to a widening valuation gap – the difference between price expectations of buyers and sellers. For example, in 2022, Walgreens Boots Alliance (WBA) attempted to complete a sale of the Boots pharmacy chain to private equity firm Sycamore Partners, yet due to market volatility and a lack of suitable offers failed to do so, demonstrating how market conditions are making it increasingly difficult to carry out exits at attractive valuations.
As a result, private equity firms have faced exit slowdown, resulting in a build-up of assets within portfolios. This has therefore brought prolonged holding periods, as GPs delay divestments in anticipation of more favourable market conditions. This may be lower interest rates to reduce cost of leverage buyouts, narrower valuation gaps, stronger public markets leading to better IPO conditions or more confidence in future earnings and thus lower market volatility. This dynamic is illustrated in Vista Equity Partners’ decision to extend its holding of Cloud Software Group by transferring it into a continuation vehicle, rather than following a traditional exit strategy, reflecting a broader reluctance of GPs to sell assets at unattractive valuations.
For LPs, this has resulted in reduced cash distributions. With capital remaining locked in existing funds, LPs face a growing liquidity demand and a constrained capacity to commit to new funds. This shift highlights that whilst historically liquidity pressures would have driven LP-led secondary transactions, in the current environment these often require selling at discounts, resulting in lower realised valuation, therefore making them less attractive. In Vista’s case, investors who chose to exit received a return of around 4x on their investment, while others were able to roll over their capital into the continuation vehicle alongside new investors.
This illustrates that GP-led secondaries, such as continuation vehicles, are an emerging solution for generating liquidity. By transferring selected assets into new vehicles, GPs can provide liquidity to existing investors, whilst still retaining ownership of high-quality assets which may have further upside potential. This allows LPs to either exit their existing position or roll over their investment into the new continuation vehicle, effectively addressing liquidity needs without compromising value by forcing value-destructive exits.
However, it is important to notice that even more recently, these market conditions may be beginning to reverse or at least stabilize due to recent geopolitical tensions. For example, in
September 2025, the Federal Reserve lowered interest rates, although they have since remained at a standstill. As a result, financing conditions are gradually improving and valuation gaps are narrowing, especially in top-tier M&A deals. This suggests that some of the pressures that initially drove the rise of GP-led secondaries may begin to ease over time.
Taken together, these developments show that GP-led secondaries are not simply a temporary response to market disruption, but part of a broader transformation in private equity.
Conclusion
Nevertheless, despite the market conditions constantly changing, it is unlikely for the growth of GP-led secondaries to reverse. Yes, whilst their rapid expansion was initially driven by a constrained exit environment, their continued use reflects a broader evolution and an increasing demand for flexibility in private equity. Rather than being purely cyclical, GP-led transactions have become another tool for generating liquidity, allowing LPs to roll their investments and for GPs to retain ownership and extend value creation. As a result, they are set to remain a central feature of the private equity landscape.
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