The bid percentage is fixed on the reference NAV; the cheque, and the real discount, move with every call, distribution and mark until closing.
A secondary price is quoted as a percentage of the NAV at a reference date, then adjusted dollar for dollar: plus capital calls the seller paid, minus distributions the seller received between the reference date and closing. On a $50.0m interest bought at 90 per cent, $3.0m of calls and $6.5m of distributions turn a $45.0m headline into a $41.5m cheque, an effective discount of 14.43 per cent to the NAV the buyer actually receives, not 10.
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 →
The headline percentage is the number everyone remembers from the bid. It is also the number least likely to describe what was paid. A secondary sale signs months after the reference date, usually the last quarter-end NAV the general partner has reported, and closes months after that, once transfer consent comes through. During that interval the fund keeps calling and distributing, and the portfolio keeps moving. The purchase agreement deals with the first two mechanically. The third is the buyer's from the reference date onwards, whether it likes it or not.
| Input | Value |
|---|---|
| NAV at the reference date (31 December) | $50.0m |
| Price, per cent of reference NAV | 90% |
| Unfunded commitment at the reference date | $8.0m |
| Capital calls paid by the seller before closing | $3.0m |
| Distributions received by the seller before closing | $6.5m |
| Unrealised value change over the period (4 per cent) | $2.0m |
The headline price is the bid percentage applied to the reference NAV. Nothing else enters it.
Headline = reference NAV × price % = $50.0m × 90% = $45.0m
The discount in dollars is fixed at this moment: $50.0m less $45.0m, or $5.0m. Everything that follows changes the NAV around it, not the dollar discount.
The seller funded $3.0m of calls that now sit in the fund and belong to the buyer, so the buyer reimburses them. The seller pocketed $6.5m of distributions that came out of the NAV being bought, so they come off the price. Both adjustments are at par, not at the bid percentage.
Adjusted price = headline + calls − distributions
$45.0m + $3.0m − $6.5m = $41.5m. In a spreadsheet, with the reference NAV in B2, the price in B3, calls in B5 and distributions in B6: =B2*B3+B5-B6.
Net flows were −$3.5m, so the NAV after the flows, ignoring any change in value, is $46.5m. The buyer pays $41.5m for it: 89.25 per cent, a discount of 10.75 per cent. The percentage discount has widened on its own, because a fixed $5.0m discount now sits on a smaller NAV. Distributions in the gap period deepen the percentage discount; calls dilute it.
The purchase agreement transfers the economics as of the reference date. Any rise or fall in the portfolio since then is the buyer's, and the price does not move with it. Here the portfolio gained $2.0m, so the buyer receives a NAV at closing of $48.5m.
Closing NAV = reference NAV + calls − distributions + value change = $48.5m
Effective price = $41.5m ÷ $48.5m = 85.57%, a discount of 14.43 per cent.
The buyer books the interest at $48.5m on a cost of $41.5m and reports a $7.0m gain on day one, 16.9 per cent of cost. None of that is skill at closing: $5.0m is the purchase discount fixed at the reference date, and only $2.0m is the portfolio's gain since then, which the locked-box price does not pass back to the seller. The unfunded commitment, meanwhile, has fallen from $8.0m to $5.0m, because the seller paid part of it.
| Distributions before closing | Adjusted price | Closing NAV | Price % of closing NAV | Effective discount |
|---|---|---|---|---|
| $0.0m | $48.0m | $55.0m | 87.27% | 12.73% |
| $3.0m | $45.0m | $52.0m | 86.54% | 13.46% |
| $6.5m | $41.5m | $48.5m | 85.57% | 14.43% |
| $10.0m | $38.0m | $45.0m | 84.44% | 15.56% |
| $15.0m | $33.0m | $40.0m | 82.50% | 17.50% |
The value change cuts both ways, which is the part a buyer should price before signing rather than discover at closing:
| Value change since reference date | Closing NAV | Price % of closing NAV | Effective discount |
|---|---|---|---|
| −$4.0m | $42.5m | 97.65% | 2.35% |
| $0.0m | $46.5m | 89.25% | 10.75% |
| $2.0m | $48.5m | 85.57% | 14.43% |
| $5.0m | $51.5m | 80.58% | 19.42% |
The point of the second table: a $4.0m markdown between the reference date and closing leaves a buyer who "bought at a 10 per cent discount" paying 97.65 per cent of what it receives. The discount was a hedge against exactly this, and it was spent before the interest transferred.
Quote the bid as a percentage if you must, but underwrite three numbers: the adjusted cash price, the NAV you expect at closing, and the ratio between them. In this case they give 14.43 per cent, not 10, and the difference is decided by events the buyer does not control. The rebuild of a reported NAV, and the bid one-pager with the NAV rolled forward, are in the free workbooks for this book. For what happens when the floor and the ceiling never meet, see why a secondaries bid-ask gap often has no zone; for the real estate version of the same correction, what an 18 per cent discount actually buys.
At par. A distribution is cash the seller has already received out of the NAV being sold, so it comes off the price dollar for dollar. Deducting it at the bid percentage overpays: on a $50.0m interest bid at 90 per cent with $6.5m of distributions and $3.0m of calls, the error is $0.35m in the seller's favour.
The buyer. The economics transfer at the reference date and the price is not remarked. In the worked case a $2.0m gain widens the effective discount from 10.75 to 14.43 per cent, while a $4.0m markdown leaves the buyer paying 97.65 per cent of the NAV it receives despite a 10 per cent headline discount.
Because it books the interest at the closing NAV against an adjusted cost set on the reference date. Here the buyer pays $41.5m for a NAV of $48.5m and records $7.0m, 16.9 per cent of cost, before owning the interest a single day: $5.0m of purchase discount and $2.0m of value change since the reference date. It is a mark, not a realised return.
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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