What are Secondary Market Transactions

A secondary market transaction can be simple on the surface, but messy underneath.  In short, it means someone who already owns a private market interest sells it to someone else.  What moves is the existing position, along with the economics, the rights, and every complication attached to them.

The word “secondary” gets thrown around for four structurally different deals. The differences matter.

The four structures

1. Direct secondary (share transfer)

A founder, early employee, angel or seed fund sells their shares straight to a new buyer. The equity transfers. So do the rights attached to those shares under the articles and shareholders’ agreement — or at least they should.

In a clean cap table, the transfer agreement is clear about what follows the shares. In a messy one, the buyer discovers after closing that information rights stayed with the original holder, the board observer seat evaporated, or pro-rata rights never moved. You are buying the equity itself, not a wrapper. That is both the appeal and the risk.

2. LP interest transfer

The seller is a limited partner in a fund. What changes hands is the LP interest, not the underlying companies. The buyer steps into the seller’s shoes: takes any remaining unfunded commitment, receives future distributions, and inherits whatever relationship (usually minimal) the original LP had with the GP.

You are not buying Company A or Company B. You are buying a slice of a portfolio that holds both, plus everything else. Pricing reflects the entire book, the GP’s ability to exit, remaining fund life, and the discount the buyer demands for waiting. This is the largest part of the secondary market by volume. Sellers are usually institutions solving a portfolio problem — over-allocation, their fund is winding down, or other liquidity needs.

3. Continuation vehicle (GP-led secondary)

In this scenario, the General Partner wants to keep managing the assets.  So, a new vehicle is created, money is raised and existing LPs are offered a choice - exit at a specified price or roll.

These are purpose-built vehicles with new economics, a new term, and a price that is supposed to have been set at arm’s length. The inherent conflict is obvious: the GP is both seller (pricing the old fund) and buyer (continuing to manage the asset). Fairness opinions are the standard safeguards. Whether they are enough is still debated.

4. Single-purpose and focused secondary SPVs

These are a newer and fast-growing layer. Specialists and opportunistic managers form single-purpose or tightly focused SPVs whose sole job is to acquire secondary shares or LP interests in specific companies or themes. They raise capital from investors who want exposure to those names without having to source, diligence, and negotiate the secondaries themselves.

The SPV provides access and packaging. In return it takes a fee or promote. The buyer gets a cleaner entry point. The original seller gets a bid that might not have existed otherwise.

The risk here is structure. An SPV buying into another SPV that itself sits inside a fund or continuation vehicle creates chains of fees, information lag, and governance distance. What looks like a clean secondary position can turn into SPVs of SPVs of SPVs — each level adding cost and opacity while the underlying asset stays the same.

Pricing: what the discount (or premium) actually reflects

A secondary almost always trades at a discount to the last round valuation. Sometimes it trades at a premium. There are several reasons why this may happen.

A discount to the last round is not the same as a discount to fair value. The last round set a price at a specific moment, in a specific market, for primary capital with full rights. A secondary buyer is acquiring those shares in a completely different market, with potentially different rights.  A 30% discount to a peak-2021 multiples may still be very expensive. A 10% discount on a conservative round where the company has grown since may still actually be very rich.

The discount reflects a variety of risks, not just valuation. A secondary bid is pricing: the time until the next liquidity event (IPO, acquisition, next round), the dilution risk in the interim (future rounds that may come in ahead of or beside you), the information asymmetry between the seller who has been inside the cap table and you who are stepping in, the uncertainty about whether the rights you're acquiring are the rights you think you're acquiring, and the opportunity cost of capital tied up in an illiquid position with no guaranteed exit.

Premiums happen when there is more certainty ahead. A position in a company twelve months from a credible IPO, with a clean cap table and no dilution risk, where the last round was priced conservatively, may trade at or above the last round. The buyer is paying up for certainty of exit and reduced execution risk. Premiums are rarer, but they do exist, particularly in late-stage or hot deals.

Why the right of first refusal can freeze everything

Pricing a secondary correctly is important, but it's not the whole story.

Most shareholder agreements and fund LP agreements contain transfer restrictions. The two that matter most in practice are the right of first refusal (ROFR) and the company consent right.

A ROFR gives existing shareholders or the company itself the right to match any third-party offer before the seller can close with an outside buyer. The mechanics vary — some require the ROFR holder to match within ten business days, some give thirty, some allow assignment of the right to other existing shareholders — but the effect is the same: you can negotiate a deal, agree on price, execute term sheets, but end up with a frozen or failed trade because an existing shareholder elects to step in at your price.

If you're a secondary buyer, the ROFR holder gets the benefit of your analysis, your price discovery, and your negotiation, and then decides whether to exercise at that price. You funded the process. They captured the option.

A company consent right is simpler and often more absolute. The company must approve any transfer of shares. There is no matching mechanic — the company can simply say no, with or without reason, and the transfer fails. Companies use this to control who is on their cap table, to prevent a position moving to a competitor or an unwelcome financial buyer, or simply because the board is busy with other matters and couldn't be bothered to look at it.

So deals that look clean on paper can get delayed or killed more often than buyers expect. The gap between signing and closing — sometimes eight to twelve weeks — is exactly the period when something can change in the underlying business, the market, or the counterparty's willingness to cooperate.

What this means if you are the seller

You have a position. You want liquidity. Your first question should not be "what's my price" — it should be "do I actually have the right to sell this." Pull the shareholder agreement or LP agreement before you talk to a buyer. Try and map the ROFR holders, the consent rights, and the timeline each right creates. If you find a buyer, agree on a price, and then spend twelve weeks scrambling for consents while the buyer's interest cools, you have wasted both parties' time.

The second question is what rights actually transfer with the position. Confirm whether your rights survive the transfer under the agreement as written. A position that carries strong information rights in your hands may carry none in the buyer's hands if the agreement ties those rights to the original investor.

What this means if you are the buyer

Due diligence in a secondary has two layers that run parallel. The first is underwriting the asset — what is it worth, what is the path to liquidity, what is the dilution risk. The second is underwriting the transfer — what restrictions exist, who has to consent, what the timeline is, and whether the seller has clean title to what they're selling.

Underwriting is where secondary buyers with less experience mess up. They underwrite the company and assume the transfer is just paperwork.  It is not.

The honest floor

Secondary transactions in well-structured assets with clean transfer rights are genuinely useful tools for liquidity management and portfolio repositioning. They work.

Secondary transactions in assets with complex cap tables, layered consent rights, and misaligned ROFR holders are slow, expensive, and frequently fail at the consent stage rather than the pricing stage. The constraint is legal and relational, not financial.

And pricing any secondary off last-round valuation without asking why the seller is selling, what has changed in the business since that round, and whether the rights being acquired are the rights being assumed — that is where recoveries fall short of what the headline discount implied. The discount to last round is visible. The risks embedded in the transfer mechanics are not.

At YMC Capital we spend a lot of time on exactly these situations — helping family offices and companies unlock stuck or illiquid private market positions when the path to liquidity is more complicated than a simple share transfer.