The allocation schedule decides what the buyer loses when a GP exercises its right of first refusal or refuses consent on one line.
Allocate a secondary portfolio bid line by line, at the price each fund interest is worth to you on your own underwriting, not as one flat percentage of NAV. On an illustrative four-fund portfolio bid at 90.9 per cent of NAV for a 15 per cent IRR, a flat allocation prices the best fund 4.80 below its value, and if its GP pre-empts at that price the buyer is left holding the other three lines at a 12.4 per cent IRR. Allocated on value, the same pre-emption leaves the buyer exactly at 15.0 per cent.
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 →
Portfolio sales are bid as one number and closed as a list. The purchase agreement has to say what is paid for each interest, because each one transfers separately: a GP can refuse consent, exercise a right of first refusal, or let existing LPs pre-empt at the allocated price, and the usual mechanism is that the excluded interest drops out and the price falls by its allocated amount. The allocation is therefore not bookkeeping. It decides what the buyer loses when one line does not close.
| Interest | Reported NAV | Buyer's expected proceeds | Proceeds / NAV |
|---|---|---|---|
| Fund A, mid-life buyout | 40.0 | 72.0 | 1.80x |
| Fund B, growth | 30.0 | 48.0 | 1.60x |
| Fund C, older buyout | 20.0 | 28.0 | 1.40x |
| Fund D, tail-end | 10.0 | 11.0 | 1.10x |
| Portfolio | 100.0 | 159.0 |
The buyer targets a 15 per cent IRR over a four-year hold. No unfunded commitments, no deferred payment and no leverage, so that the only moving part is the allocation.
Line value = expected proceeds ÷ (1 + target IRR)hold, with the discount factor 1.154 = 1.7490.
Fund A: 72.0 ÷ 1.7490 = 41.17. Fund B: 27.44. Fund C: 16.01. Fund D: 6.29.
Portfolio bid = 41.17 + 27.44 + 16.01 + 6.29 = 90.91, or 90.9 per cent of NAV, a 9.1 per cent discount.
In Excel, with proceeds in C2:C5: =C2/(1+15%)^4 per line, and =SUM(D2:D5)/SUM(B2:B5) for the headline percentage.
Each line, bought at its own value, returns 1.75x and 15.0 per cent. The whole portfolio returns the same. The headline 90.9 per cent is an output of four separate prices, ranging from 102.9 per cent of NAV for Fund A to 62.9 per cent for Fund D.
The shortcut is to write 90.9 per cent of NAV against every line. The totals agree, so nobody notices that value has moved between lines.
| Interest | Value to buyer | Flat allocation | Allocation less value | IRR at flat price |
|---|---|---|---|---|
| Fund A | 41.17 | 36.36 | −4.80 | 18.6% |
| Fund B | 27.44 | 27.27 | −0.17 | 15.2% |
| Fund C | 16.01 | 18.18 | 2.17 | 11.4% |
| Fund D | 6.29 | 9.09 | 2.80 | 4.9% |
| Portfolio | 90.91 | 90.91 | 0.00 | 15.0% |
The gaps sum to zero, which is why the error is invisible at portfolio level. But Fund A is now on offer at 4.80 below what it is worth, 12.0 per cent of its NAV, and the cheap price is published to exactly the people best placed to recognise it: its GP and its existing LPs.
Fund A's GP exercises its ROFR at the allocated 36.36. The buyer's price falls by the same amount.
Buyer pays 90.91 − 36.36 = 54.55 for Funds B, C and D, which are expected to return 87.0.
IRR = (87.0 ÷ 54.55)1/4 − 1 = 12.4%, a 1.60x multiple.
At 15 per cent those three lines are worth 49.74. The buyer has overpaid by 4.80: precisely the bargain handed to Fund A's GP.
With a value-based allocation the same event is harmless. Fund A leaves at 41.17, the buyer pays 49.74 for the remaining three lines and earns 15.0 per cent on them. The buyer loses a good asset but not money, and the GP who pre-empts pays full value for the privilege.
| Line that drops out | Paid, flat allocation | IRR, flat allocation | Paid, value allocation | IRR, value allocation |
|---|---|---|---|---|
| Fund A | 54.55 | 12.4% | 49.74 | 15.0% |
| Fund B | 63.64 | 14.9% | 63.46 | 15.0% |
| Fund C | 72.73 | 15.8% | 74.90 | 15.0% |
| Fund D | 81.82 | 16.0% | 84.62 | 15.0% |
The flat column is a lottery whose odds are set against the buyer. A GP pre-empts when the allocated price is low relative to what it knows about its own portfolio, which is the Fund A row. Nobody pre-empts the tail-end fund at 90.9 per cent of NAV, so the rows that would help the buyer, C and D, are the ones that do not happen. Consent refusals are less strategic, but the asymmetry still runs one way. The value column is flat at 15.0 per cent whatever drops out, which is the point of it.
Seller's side: the seller is indifferent between allocations only if every line closes. A seller that wants certainty of closing has its own reason to prefer value-based figures: a mispriced line invites pre-emption, and a pre-empted line is a second, separate negotiation.
The mistake is treating the allocation schedule as an administrative annex filled in after the headline is agreed, usually pro rata to NAV because that is what the data room provides. The buyer has already done the work that a proper allocation needs: the bottom-up valuation of each fund, as in how to price an LP interest on a bottom-up NAV. Allocating on anything else throws that work away at the exact moment it has legal force.
Two refinements matter in practice. First, value each line on its own cash flow timing, not a single exit date as here; a fund that distributes early carries a higher value per unit of proceeds. Second, where a line carries unfunded commitments, allocate on the price of the NAV and state the unfunded separately, so the pre-empting party also takes over the obligation it implies. How a portfolio's headline discount itself should be quoted is covered in how to calculate the discount on a portfolio of LP interests.
Bid the portfolio, allocate the lines on value. Here a flat 90.9 per cent of NAV mispriced Fund A by 4.80 and turned a 15.0 per cent deal into 12.4 per cent the moment its GP used its ROFR; value-based allocation kept every outcome at 15.0 per cent. The line-by-line deal model, with its distributions and remaining calls over time, is in the free workbook for this case.
It is the part of a portfolio price assigned to each fund interest in the purchase agreement. It matters because interests transfer one by one: if a GP refuses consent or exercises a right of first refusal, that line is usually removed and the price falls by its allocated amount. In the illustrative case the flat allocation puts Fund A at 36.36 against a value to the buyer of 41.17.
A GP or its existing LPs pre-empt when the allocated price looks cheap against what they know about the portfolio. That makes pre-emption adverse selection for the buyer. In the illustrative portfolio a flat 90.9 per cent of NAV prices the strongest fund 12.0 per cent of its NAV below value, which is exactly the line most likely to be taken away.
No. If all four interests transfer, the buyer pays 90.91 for 159.0 of expected proceeds and earns 15.0 per cent whatever the allocation. The allocation only bites when a line drops out, which is why it is often left to the end of the negotiation and why a buyer should insist on value-based figures before signing.
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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