Private Secondary Funds: Liquidity Solution or Risk Transfer?

March 2026 

Introduction 

Secondary funds have become one of the fastest growing parts of private markets, spanning both private equity and private credit. That growth reflects a real shift in market conditions as exits have slowed, fund lives have extended, and many investors have found more capital tied up than they originally expected. In response, secondaries have emerged as a practical way to rebalance portfolios and address liquidity needs when primary exits aren’t available. 

From an advisor and client perspective, the appeal is easy to understand. Secondary strategies are often framed as a best-of-both-worlds solution with access to more seasoned assets, less blind pool risk, and the ability to invest at a discount to reported net asset value. In theory, that translates into faster diversification and a shorter path to liquidity. 

The reality today is more nuanced. Competition has intensified, discounts have narrowed, valuation practices have grown more aggressive, and a meaningful portion of reported performance is driven by early markups rather than realized outcomes. Secondary investing hasn’t removed risk from private markets it has simply changed where that risk shows up and how it is experienced. 

This paper takes a closer look at how secondary funds actually work in today’s environment, where return assumptions tend to be most fragile, and why RIAs should be cautious about treating secondaries as inherently defensive or liquidity enhancing. 

What Are Secondary Funds? 

Secondary funds invest in existing private market assets rather than making new, primary commitments. Instead of backing a manager at the start of a fund’s life, secondary investors buy interests in portfolios that are already partially or fully invested. 

These transactions can take several forms. A secondary fund might purchase limited partner interests from an existing investor who wants liquidity or acquire assets through a continuation vehicle when a general partner extends ownership of a portfolio company beyond the original fund term. In private credit, secondary transactions may involve purchasing seasoned loans or portfolios that have already been originated. 

The appeal of secondary funds is that investors gain exposure to assets with operating history, existing cash flows, and more visibility into portfolio composition. At the same time, secondary investing introduces its own set of risks tied to pricing, valuation assumptions, and exit timing. This makes structure, discipline, and underwriting quality especially important. 

Why Secondary Markets Are Growing and What That Really Means 

The rapid growth of secondary markets reflects real structural pressures across private investing. Capital has stayed locked up longer than expected, distributions have slowed, and many institutional investors are now managing allocation limits rather than underwriting views. When primary exits aren’t available, secondaries provide flexibility. 

But that growth also signals rising urgency. Liquidity today is being sought not just for portfolio fine tuning but to address mismatches between expected and actual cash flows. In that environment, secondary markets increasingly function as a place where exposure changes hands from investors who no longer want to hold it to those willing to step in. 

That context matters for RIAs. Secondary opportunities don’t appear in isolation. They exist because someone else has decided that continuing to own the asset is less attractive than selling it, even at a discount. Understanding why that decision is being made is central to determining whether a transaction represents genuine opportunity or simply a transfer of risk. 

Secondary fund AUM has grown rapidly alongside rising fundraising activity, increasing competition for deals and compressing entry discounts across the secondary market. 

Discounts, Competition, and How Performance Can Be Misleading 

One of the most misunderstood aspects of secondary investing is how discounts translate into reported returns. Secondary buyers often acquire assets below stated NAV, which creates the appearance of immediate value creation. In many cases, those assets are marked back toward par or stated NAV shortly after the transaction closes. 

On paper, this shows up as strong early performance. In reality, it is often accounting normalization rather than fundamental improvement. The asset didn’t suddenly become more valuable but rather the valuation framework simply changed hands. 

This is important for RIAs because early returns in secondary funds can be heavily influenced by entry pricing and re-marking rather than by operational progress or realized cash flows. That doesn’t make the strategy inherently flawed, but it does mean early performance can be front loaded and difficult to repeat. 

At the same time, competition in the secondary market has increased significantly. Large asset managers with steady inflows are under pressure to deploy capital, which has compressed discounts, particularly for higher quality assets. Increasingly, secondary buyers are acquiring assets at or near par simply because capital needs to be invested. 

Buying at par changes the return profile entirely. When there is little or no discount, returns become highly dependent on exit timing, multiple expansion, and execution going exactly right. In a slower exit environment, that leaves investors exposed to downside without the cushion discounts once provided. If a secondary fund is buying assets at or near par, how different is that risk from a primary investment? In many cases, the answer is not very. The “secondary” label alone does not guarantee defensive characteristics. Additionally, in many cases, a significant portion of the underlying asset’s growth has already occurred before the secondary transaction takes place. 

One important implication of this dynamic is that fund structure matters, particularly in secondary investing. Drawdown secondary funds tend to be better aligned with how value is actually created in this market. Capital is called when specific transactions are identified, pricing is locked in at purchase, and return expectations are set based on known assets rather than rolling portfolios. 

Evergreen secondary structures, by contrast, face a more difficult challenge. They must continuously deploy new capital, often into a highly competitive market where discounts have already compressed and much of the underlying asset growth has already occurred. To maintain target returns and liquidity features, these vehicles can become more reliant on remarking, steady inflows, or favorable market conditions rather than true entry level value creation. 

For RIAs, the distinction is meaningful. Drawdown secondary funds allow investors to underwrite discrete opportunities with clearer entry pricing and defined risk, while evergreen structures can blur the line between realized value and ongoing valuation assumptions. In an environment where pricing discipline matters more than ever, that clarity can make a meaningful difference in outcomes. 

Where Returns Come From and Where the Risk Really Lives 

Another underappreciated reality of secondary funds is how returns are generated over the life of the fund. In many cases, a disproportionate share of reported value creation occurs early, driven by discount capture and revaluation rather than realized exits. 

As funds mature, incremental returns become harder to generate. Exit markets may remain constrained, holding periods can extend, and remaining assets are often more complex or less liquid. At that stage, outcomes tend to depend more on market conditions than on underwriting skill. 

This dynamic affects how performance should be interpreted. Early investors may see strong reported returns that flatten over time, while capital deployed later can be more exposed to slower realizations and higher sensitivity to exit markets. Headline IRRs may look attractive, but long-term cash-on-cash outcomes often tell a more complete story. 

These dynamics show up across both private equity and private credit secondaries. In private equity, risk tends to center on exit assumptions. Assets may look mature on paper, but realizations still depend on buyer demand, financing availability, and sponsor behavior. In private credit, opacity adds another layer, as discounts may reflect borrower stress or refinancing challenges rather than simple mispricing. 

Across both asset classes, valuation lag plays a central role. Secondary transactions are often the first true moment of price discovery. Discounts frequently reflect adjustments that haven’t yet appeared in reported NAVs elsewhere in the system. 

The key takeaway is straightforward. Secondary markets don’t eliminate valuation risk. They surface it. 

How Divergent Evaluates Secondary Funds 

Secondary strategies require a different due diligence mindset than primary investments. In secondaries, risk is often less about what the asset is and more about why it’s being sold, how it’s priced, and how returns are expected to materialize. At Divergent Capital Asset Management, our process is designed around answering those questions clearly. 

We start by understanding seller motivation. Assets sold for portfolio rebalancing or regulatory reasons look very different from those sold because exits are stalled, fund lives are stretching, or asset level issues are emerging. That context shapes how conservative our assumptions need to be. 

From there, we dig into valuation mechanics. Discounts aren’t taken at face value. We look at how NAVs were constructed, how recently assumptions were updated, and whether a transaction represents true mispricing or delayed price discovery. When assets are bought at a discount and quickly marked back toward par, we’re cautious about treating early gains as real value creation. 

We also focus on deployment discipline. In a competitive market, some managers feel pressure to invest quickly, even as pricing tightens. We assess whether underwriting standards hold up as capital scales and whether managers are willing to stay patient when attractive opportunities are scarce. 

Finally, we evaluate where returns are expected to come from over the life of the fund and how outcomes might change if exit markets remain constrained longer than anticipated. Throughout the process, we emphasize transparency, alignment, and realistic expectations. 

The goal is to help RIAs see past labels and optics and understand how risk is being shifted not removed. 

Conclusion 

Secondary funds are a reflection of the current state of private markets. Liquidity is more valuable, exits are less predictable, and capital is under pressure to find a home. In that environment, secondaries can either create opportunity or concentrate risk, depending on how they’re underwritten and positioned. 

The most important insight for RIAs is that risk doesn’t disappear in secondary markets but instead it moves. Discounts can fade through accounting. Buying at par compresses margins. Early performance can flatter reality. Understanding these dynamics allows advisors to use secondary strategies intentionally rather than reactively. 

When approached with discipline and communicated clearly, secondary funds can complement long-term portfolios. When treated as a cure for liquidity or volatility, they can introduce new vulnerabilities. Knowing the difference is what separates thoughtful allocation from unintended exposure. 

About Divergent Capital Asset Management 

Divergent Capital Asset Management helps RIAs and family offices access and build customized portfolios of private market investments including private credit, private equity, venture capital, and real estate. The firm provides institutional quality infrastructure for sourcing, structuring, and managing alternative investments. They handle everything from due diligence to administration, allowing advisors to offer branded, turnkey private market solutions. Divergent’s platform bridges the gap between institutional access and independent advisor needs. 

Divergent Capital Asset Management LLC (“DCAM”) is a registered investment advisor offering advisory services in the states of Georgia, Florida, Texas, Louisiana, Colorado, California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. A copy of DCAM’s current written disclosure statement discussing DCAM’s business operations, services, and fees is available on the SEC’s website at www.adviserinfo.sec.gov or from DCAM upon written request.