A deferred purchase price is an interest-free loan from seller to buyer. Priced at both sides' rates, it explains why headline secondary prices rise while effective prices fall.
A deferred payment is worth what each side discounts it at, so it has two values. On an illustrative LP interest with a NAV of 100 sold at 88, paying half the price a year after closing without interest is worth 84.74 to a seller whose money costs 8 per cent, an effective discount of 15.26 per cent rather than 12. The same structure lifts the buyer's IRR from 16.4 to 20.8 per cent, because the seller has lent the buyer 44 for a year at zero.
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 →
Deferred consideration is common in LP portfolio sales when buyers stretch for a headline price that a seller's board will sign. The headline percentage of NAV is what gets reported. The effective price, and the risk that has moved from one side to the other, are what each party should actually be pricing.
| Input | Value |
|---|---|
| Reported NAV at the reference date | 100.0 |
| Headline price, per cent of NAV | 88 |
| Share of the price deferred | 50% |
| Deferral period, no interest | 12 months |
| Expected distributions, years 1 to 4 | 22 / 35 / 40 / 33 |
| Total expected distributions | 130.0 |
| Seller's cost of money | 8% |
All cash, the buyer pays 88 at closing and collects 130 over four years: a 1.48x multiple and an IRR of 16.4 per cent. With half deferred, it pays 44 at closing and the other 44 at the end of year 1, the same date the first distribution of 22 arrives.
| Year | 0 | 1 | 2 | 3 | 4 | IRR |
|---|---|---|---|---|---|---|
| All cash | -88.0 | 22.0 | 35.0 | 40.0 | 33.0 | 16.4% |
| 50% deferred one year | -44.0 | -22.0 | 35.0 | 40.0 | 33.0 | 20.8% |
The multiple is unchanged at 1.48x. Only the timing moved, and it moved 4.3 points of IRR. The fund's own year 1 distribution pays 50.0 per cent of the deferred cheque; the buyer funds the other 22 itself.
Effective price = upfront cash + deferred amount ÷ (1 + seller's rate)years
= 44.0 + 44.0 ÷ 1.08 = 44.0 + 40.74 = 84.74
Effective discount to NAV = 1 − 84.74 ÷ 100 = 15.26 per cent. In Excel, with the price in B1, the deferred share in B2, the years in B3 and the rate in B4: =B1*(1-B2)+B1*B2/(1+B4)^B3.
The seller gave up 3.26 points of NAV against an all-cash 88. An all-cash bid of 86 would have been worth more to it than the headline 88 it accepted. Add the seller's exposure to the buyer's credit for a year, which the formula ignores, and the true cost is higher still.
The buyer discounts the deferred cheque at its own target return, not the seller's. That opens a range in which both can be better off than with an all-cash 88.
Headline at the all-cash IRR = all-cash price ÷ (upfront share + deferred share ÷ (1 + buyer IRR)years)
= 88.0 ÷ (0.5 + 0.5 ÷ 1.164) = 94.68
The seller values a 94.68 headline, half deferred, at 91.18 at its 8 per cent rate. Anywhere between an effective 88 and 91.18, both sides beat the all-cash trade.
The room exists only because the buyer's required return is above the seller's cost of money. It is the same gap between two rates that decides whether a secondaries bid-ask zone exists at all; deferral is one of the few tools that turns the difference into a price both sides can accept. That essay works the buyer's side, how far a deferral stretches the headline and which distribution funds the second cheque; the question here is the seller's, what a deferred headline is really worth before it signs. Read the other way: an all-cash buyer would need to pay only 80.43 to earn the deferred buyer's 20.8 per cent, 7.57 points below the headline.
The stress case moves every distribution one year later, the risk the buyer cannot hand back. The deferred cheque is fixed in date; the cash that was meant to fund it is not.
| Structure | Seller's effective price | Effective discount | Buyer IRR, base | Buyer IRR, one year late |
|---|---|---|---|---|
| All cash | 88.00 | 12.0% | 16.4% | 11.5% |
| 25% deferred, 1 year | 86.37 | 13.6% | 18.3% | 12.4% |
| 25% deferred, 2 years | 84.86 | 15.1% | 20.3% | 13.3% |
| 50% deferred, 1 year | 84.74 | 15.3% | 20.8% | 13.4% |
| 50% deferred, 2 years | 81.72 | 18.3% | 27.0% | 15.9% |
With half deferred for one year, a one-year delay costs the buyer 7.3 points of IRR against 4.9 all cash. The deferred buyer still ends ahead in this case, but it gives back more of its return, because the cheque falls due before any distribution has arrived. That asymmetry is the leverage showing through.
Discount the deferred cheque twice: at the seller's rate to find what was really paid, and at the buyer's to find what it was really worth. Here an 88 headline is 84.74 to the seller and a 4.3 point IRR gift to the buyer, and the gift is the first thing a late exit takes back. The Private Equity Secondaries Investor prices the deferred purchase price on its own worked deal, and the free workbook for this case carries the floor, the ceiling and the deferral sheets live.
Economically, yes: the seller lends part of the price to the buyer at zero interest and is repaid from the buyer's balance sheet, not from the fund. In the example, deferring 44 for a year lifts the buyer's IRR from 16.4 to 20.8 per cent, and if distributions arrive a year late the deferred buyer loses 7.3 points of IRR against 4.9 all cash, the signature of gearing.
Discount each deferred instalment at the seller's own cost of money and add the upfront cash. At an 8 per cent rate, 44 now and 44 in a year is worth 84.74, not 88. An all-cash bid of 86 beats it. With half the price deferred two years the effective value falls to 81.72, an 18.3 per cent discount to NAV.
Because they discount the deferred cheque at their own, higher target return. A buyer earning 16.4 per cent all cash at 88 can pay 94.68 with half deferred for a year and keep the same IRR, while the seller values that headline at 91.18. The gap between the two rates is the room the structure creates.
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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