Rolling is a decision to buy the asset again at the deal price, so measure it on the cash you give up, after the new fees and carry.
Treat rolling as buying the asset again at the deal price: compare the cash price with the net value of the rolled stake, after the continuation vehicle's new fee and carry, discounted at your own required return. On an illustrative deal at 95 per cent of NAV with a 1.80x gross exit in four years, rolling nets 15.0 per cent on the 95 forgone and is worth 10.53 more than selling at a 12 per cent required return. Rolling only loses below a 1.61x gross exit.
Worked in full in The Private Equity Secondaries Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In a GP-led continuation vehicle, the existing limited partners usually get two options on the same asset: take cash at the price the lead buyer has set, or roll their interest into the new vehicle on the new terms. The election form arrives with a short deadline and a fairness opinion that speaks to the price, not to the choice. The choice is a small present value calculation, and most of the error comes from measuring it against the wrong base.
| Input | Value |
|---|---|
| LP's share of reported NAV | 100 |
| Deal price, per cent of NAV | 95 |
| Cash if the LP sells | 95 |
| GP's projected gross exit value, year 4 | 180 |
| New management fee, per year on the rolled value | 1.0% |
| New carried interest, full catch-up | 12.5% |
| New preferred return, compounding | 8% |
| LP's own required return | 12% |
Rolling LPs enter the new vehicle at the deal price, exactly like the incoming buyers. Their capital account opens at 95, and the new fee and the new hurdle are measured on 95, not on the old NAV of 100.
Fees = 95 × 1.0% × 4 = 3.80. Value before carry = 180 − 3.80 = 176.20.
Profit = 176.20 − 95 = 81.20. Hurdle value = 95 × 1.084 = 129.25, comfortably cleared, so the catch-up is complete.
Carry = 12.5% × 81.20 = 10.15. Net value to the rolling LP = 176.20 − 10.15 = 166.05.
Net IRR on the 95 forgone = (166.05 ÷ 95)1/4 − 1 = 14.98%, a 1.75x net multiple. In Excel: =(166.05/95)^(1/4)-1.
The GP's case is a 1.80x gross exit on NAV, which is 1.89x and 17.3 per cent a year on the deal price. The new terms take 2.3 points of that. The 15.0 per cent net figure is the only return that belongs in the decision.
Value of rolling today = 166.05 ÷ 1.124 = 105.53.
Value of selling today = 95. Advantage of rolling = 105.53 − 95 = 10.53 per 100 of NAV.
Equivalently, selling and reinvesting 95 at 12 per cent gives 149.48 in year 4, against 166.05 from rolling.
Then solve for the exit that makes the two equal. The rolled stake must be worth 149.48 net in year 4. Working back through the carry and the fee, that needs a gross exit of 161.07, or 1.61x of NAV and 1.70x of the deal price, a 14.1 per cent gross IRR. The GP's 1.80x case can fall 10.5 per cent before rolling stops paying.
| Gross exit | Carry | Net to LP | Net IRR on 95 | PV at 12% | Roll minus sell |
|---|---|---|---|---|---|
| 130 | 0.00 | 126.20 | 7.4% | 80.20 | −14.80 |
| 150 | 6.40 | 139.80 | 10.1% | 88.85 | −6.15 |
| 161 | 7.77 | 149.42 | 12.0% | 94.96 | 0.0 |
| 180 | 10.15 | 166.05 | 15.0% | 105.53 | 10.53 |
| 200 | 12.65 | 183.55 | 17.9% | 116.65 | 21.65 |
The payoff is not symmetrical, and the asymmetry works against the roller. Once the catch-up is complete, from a gross exit of about 138, the new carry takes 12.5 per cent of every extra unit of exit value, so the LP keeps 87.5 per cent of the upside (between 133 and 138 the catch-up gives the GP all of it). Below the hurdle, a gross exit under about 133, carry falls to nothing and the LP bears every unit of the shortfall in full: at 130 the GP takes nothing and the LP still pays the fee. Rolling hands the GP a fresh option on the asset, and the LP is the one writing it.
The price moves the answer in a way that surprises people. Holding the 180 exit, the rolled stake's net value hardly changes with the price, because the LP keeps the same asset whatever the price says. What changes is the cash it gives up.
| Price, % of NAV | Net to LP | Net IRR on price | PV at 12% | Roll minus sell |
|---|---|---|---|---|
| 85 | 165.15 | 18.1% | 104.96 | 19.96 |
| 90 | 165.60 | 16.5% | 105.24 | 15.24 |
| 95 | 166.05 | 15.0% | 105.53 | 10.53 |
| 100 | 166.50 | 13.6% | 105.81 | 5.81 |
The price cuts the other way for a roller. A low price is bad news for a seller and good news for a roller who believes the GP's case: at 85 the advantage of rolling nearly doubles. That is why an LP who intends to roll has little reason to fight the price, and an LP who intends to sell has every reason to.
The usual error is to measure the rolled return on the old NAV of 100 rather than on the 95 the LP actually forgoes. On that base the same deal shows 13.52 per cent instead of 14.98, which understates rolling by almost a point and a half and can flip a marginal decision. The opposite error is just as common: setting the GP's 17.3 per cent gross projection against the LP's hurdle, forgetting that the new vehicle charges a fresh fee and a fresh carry on value the LP already owned. Neither is the right number. (If the rolling LP is offered worse terms than the incoming buyers, rebuild the net value on those terms; what worse rollover terms actually cost prices that gap separately.) The right number is the net value of the rolled stake, discounted at the LP's own rate, against the cash.
A third, quieter mistake is to treat the decision as being about the discount. Selling at 95 does not lose 5 in any economic sense unless the stake, held on the new terms, is worth more than 95 at the LP's required return. The discount only costs a seller who would otherwise have rolled into a good deal.
Rebuild the net value of the rolled stake under the new terms, discount it at your own rate, and compare it with the cash. Then solve for the gross exit that makes them equal and ask whether the asset can miss the GP's case by more than that margin, here 10.5 per cent. The deal model in the free workbooks for this book projects the same kind of NAV-based cash flows for an LP interest. For how much of a buyer's return in a secondary comes from the entry price rather than the asset, see how much secondary return comes from the discount.
Barely, for the value you hold, because you keep the same asset either way. The price matters as the cash you give up. In the worked case moving the price from 95 to 85 changes the rolled stake's net value only from 166.05 to 165.15, but it raises the advantage of rolling over selling from 10.53 to 19.96 at a 12 per cent required return.
Its own opportunity cost for capital of that risk, not the GP's projected gross IRR. In the worked case the GP's 1.80x exit is a 17.3 per cent gross IRR on the deal price, but the new 1.0 per cent fee and 12.5 per cent carry take 2.3 points, leaving 15.0 per cent. That net figure is what to set against the LP's 12 per cent hurdle.
Often because the fund is at the end of its life and the LP wants liquidity, or because it cannot underwrite the asset. On the arithmetic alone, at 95 per cent of NAV the rolled stake needs a gross exit of only 1.61x of NAV to match a 12 per cent required return, 10.5 per cent below the GP's 1.80x case.
This article is one calculation from The Private Equity Secondaries Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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