Secondary Market Discounts Signal a ‘Rude Message’ to GPs, Argues Lee McCabe

In a recent LinkedIn post, Lee McCabe discusses the implications of discounted sales in the secondary private equity market, arguing that General Partners (GPs) often ignore crucial signals from Limited Partners (LPs) due to the uncomfortable nature of the message. McCabe frames these discounts not merely as liquidity needs but as a market sentiment that GPs must confront, especially when fundraising.

McCabe highlights the disconnect between a GP’s internal valuations and the actual price a secondary market investor is willing to pay. He states:

“When an LP sells a fund interest at a discount, it is not always a judgement on the GP. Sometimes the LP needs liquidity. Sometimes the allocation model is broken. Sometimes distributions have been slow, commitments kept coming, and the denominator effect has done what denominator effects do.”

Despite acknowledging legitimate reasons for LPs to seek liquidity, McCabe emphasizes that persistent secondary pricing below GP marks is a significant market signal that warrants attention. He points to recent market data suggesting that LP portfolio pricing averaged around 90% of Net Asset Value (NAV) in the first half of 2025, with transaction-weighted discounts in the low teens for various fund types.

The Market’s Unvarnished Feedback

According to McCabe, the discrepancy between a GP’s reported marks and the secondary market’s bid price represents a gap in the ‘official narrative.’ He observes that fundraising decks often present an overly optimistic picture, focusing on disciplined value creation without adequately addressing the realities reflected in secondary transactions.

McCabe criticizes the common practice among some firms to dismiss secondary discounts as mere inconveniences or solely attributable to liquidity pressures and portfolio construction issues. While technically fair to state that one secondary sale doesn’t reset NAV, he argues this perspective is commercially incomplete.

Confronting the Fundraising Challenge

Writing on the challenges faced by GPs in the current environment, McCabe poses critical questions that need addressing in fundraising materials when LPs are actively selling positions at a discount.

“If your LPs are selling positions at a discount while you are in market raising the next fund, the deck needs more than a confident DPI slide and some tasteful case studies. It needs an answer.”

He elaborates on the types of answers GPs should be prepared to provide, including the underlying reasons for LP liquidity needs, the causes behind lagging distributions, and justifications for why new investors should trust current marks when older fund interests are being repriced in a less forgiving private market.

“Why are LPs seeking liquidity. Why have distributions lagged. Why should new money accept your marks. Why does the next fund deserve trust when the old fund is being repriced in a private market with fewer manners.”

McCabe also touches upon the practice of some firms actively buying back or placing LP positions to control the narrative, calling it an understandable yet revealing tactic. He concludes that while secondary pricing isn’t perfect or gospel, it serves as a vital market signal in an industry often inclined to rely on marks over market realities. Ignoring these signals, he warns, can lead to a disconnect between perceived value and market valuation, turning a potential reality check into a dangerous fantasy.