A secondary bid is the sum of company-level present values, not a discount applied to the manager's NAV, and the difference shows up in where the price comes from.
Price an LP interest company by company: replace each mark with your own view, project it to its expected exit, deduct the carry on the gain above the manager's mark, and discount each company's proceeds at your required return. On an illustrative fund with a reported NAV of 100, the rebuild gives 97 and the bid at a 15 per cent return is 76.3, a 23.7 per cent discount to reported NAV. A top-down shortcut on the reported 100 would bid 79.7 and overpay by 3.4 points.
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 →
Secondary prices are quoted as a percentage of NAV, which invites the buyer to start from the manager's number and pick a discount. The bid is better built the other way round, from the companies, and the percentage of NAV is just how the result is expressed.
| Company | Manager's mark | Your view | Years to exit | Growth a year, net of fees |
|---|---|---|---|---|
| Cedar Diagnostics | 30 | 36 | 2.0 | 12% |
| Beacon Systems | 25 | 25 | 3.0 | 10% |
| Ironwood Industrial | 22 | 17 | 4.0 | 4% |
| Aspen Retail | 15 | 12 | 4.5 | 2% |
| Tail (small positions) | 8 | 7 | 4.0 | 5% |
| Fund | 100 | 97 | 3.06 | 8.34% |
The fund is assumed past its hurdle, with carry accrued on the manager's marks already deducted in the reported NAV, so every gain above those marks bears 20 per cent carry. Carry is a fund-level charge: a company that exits below its mark reduces the carry owed on the others, which is why it shows a carry credit in the rows below. The required return is 15 per cent. Unfunded commitments are left out here; they are priced separately in how unfunded commitments change a secondary price.
Exit valuei = your viewi × (1 + gi)hi
LP proceedsi = exit valuei − carry × (exit valuei − manager's marki)
Price = Σ LP proceedsi ÷ (1 + r)hi
In Excel, one row per company: =C5*(1+E5)^D5 for exit value, =F5-Carry*(F5-B5) for proceeds, =G5/(1+Req)^D5 for present value, and =SUM(H5:H9) for the bid.
| Company | Exit value | LP proceeds | Present value | PV per unit of mark |
|---|---|---|---|---|
| Cedar Diagnostics | 45.2 | 42.1 | 31.9 | 1.06 |
| Beacon Systems | 33.3 | 31.6 | 20.8 | 0.83 |
| Ironwood Industrial | 19.9 | 20.3 | 11.6 | 0.53 |
| Aspen Retail | 13.1 | 13.5 | 7.2 | 0.48 |
| Tail | 8.5 | 8.4 | 4.8 | 0.60 |
| Fund | 119.9 | 116.0 | 76.3 |
The bid is 76.3: 76.3 per cent of reported NAV, a 23.7 per cent discount, or 78.6 per cent of the underwriting NAV of 97. It returns 1.52x on the price. The discount is wide because the growth underwritten here is modest; with the same marks and faster growth the price rises. The number is only as good as the views in the second column.
The column on the right is the useful one. The manager carries Cedar at 30 and you would pay 31.9 for it, more than its mark. You would pay 11.6 for Ironwood's 22, barely half. The headline discount averages a premium on one company and a 47 per cent discount on another, and the two largest names, 62.9 per cent of your NAV, supply 69.0 per cent of the price. This interest is a bet on Cedar and Beacon, and that is where the diligence hours belong.
The top-down shortcut. Apply the value-weighted growth of 8.34 per cent to the reported 100 over the weighted horizon of 3.06 years, deduct carry and discount, and the price is 79.7, 3.4 points too high. Starting from 97 instead of 100 explains 2.0 points; the remaining 1.4 comes from the mix, because the slow-growing names are also the ones furthest from exit.
| Required return | Price | Discount to reported NAV |
|---|---|---|
| 12% | 82.4 | 17.6% |
| 15% | 76.3 | 23.7% |
| 18% | 70.7 | 29.3% |
| Cedar view | Cedar growth | Price | Change |
|---|---|---|---|
| 30, the manager's mark | 12% | 71.7 | −4.6 |
| 36, base | 12% | 76.3 | 0.0 |
| 36 | 6% | 73.4 | −2.8 |
| 40 | 12% | 79.3 | 3.0 |
One company's mark moves the bid nearly as much as three points of required return: 4.6 against 5.5. A buyer competing on price should know which of the two it is giving away.
The common mistake is to take the reported NAV as the base and argue only about the discount. That treats a 12 per cent discount on a conservatively marked fund and a 12 per cent discount on an aggressively marked one as the same deal. Here the manager marks aggressively overall, so a discount to reported NAV is partly illusory: three points of NAV, worth 2.0 points of price, are simply the marks coming down. The second mistake is to forget carry. Without it the LP proceeds are the full 119.9 and the price would be 79.3 rather than 76.3, because a fund past its hurdle passes a fifth of every gain above the reported marks to the manager, 4.0 here. Charging carry only on the gain above your own view, 4.6, is a third error: your write-ups are not the manager's, and carry follows the fund's numbers. How much of a secondary's eventual return comes from the entry discount, rather than from the companies, is worked in how much secondary return comes from the discount.
Build the bid from the companies: here a reported 100 becomes 97, and at 15 per cent the price is 76.3, with 69.0 per cent of it resting on two names. Express it as a discount to NAV at the end, not the start. The free workbook for this book carries the company-by-company rebuild, its concentration and the triage of where diligence goes.
Because the reported NAV is the manager's estimate and the companies in it differ in quality, growth and exit timing. In the illustrative fund a reported 100 rebuilds to 97, and pricing each company separately at a 15 per cent return gives 76.3. Applying one blended growth rate to the reported 100 gives 79.7, overpaying by 3.4 points of NAV.
It depends on the growth and timing you underwrite, so there is no single answer. In the illustrative fund, with value growing 2 to 12 per cent a year and exits in two to four and a half years, a 15 per cent return supports 76.3, a 23.7 per cent discount. At 12 per cent the price is 82.4; at 18 per cent it is 70.7.
In proportion to its weight and its distance from exit. In the illustrative fund Cedar Diagnostics is 36 of the 97 underwriting NAV. Valuing it at the manager's 30 instead of 36 lowers the bid from 76.3 to 71.7, 4.6 points; cutting its growth from 12 to 6 per cent lowers it by 2.8. The two largest names supply 69.0 per cent of the price.
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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