Secondary sales: getting out before the deal exits

Sometimes an investor needs out before the deal is ready to exit. A change in circumstances, a need for cash, a loss of confidence in the sponsor, and the investor wants to sell their position rather than wait years for the deal to run its course. This is where the illiquidity that the offering documents warned about stops being abstract. Selling a limited partnership interest before the deal exits is possible, but it is hard, and the difficulty is built into the structure on purpose. This article is about that secondary sale and why the deck is stacked against an easy early exit.

The subscription documents said the investment was illiquid. A secondary sale is where the investor finds out exactly how much that word costs.

Why it is hard to sell

Three things make an early exit difficult, and they compound. The first is the transfer restrictions covered in the built exit material. Most operating agreements sharply limit an investor’s ability to transfer their interest: the sponsor’s consent is usually required, a right of first refusal may let the sponsor or other investors buy first, and the securities-law framework covered in the raising section restricts who the interest can even be sold to, since the buyer generally has to be accredited and the transfer must not break the offering’s exemption. An investor cannot simply sell to whomever they like.

The second is the absence of a market. Unlike public stock, there is no exchange for private LP interests. An investor who wants to sell has to find a buyer themselves, and buyers for a minority position in a single private real estate deal, with no control and a sponsor they did not choose, are scarce. Some specialized secondary buyers exist, but they are limited and selective.

The third is the price. Because the interest is illiquid, restricted, and hard to value mid-deal, a buyer who will take it typically demands a discount, often a steep one, to the interest’s supposed underlying value. An investor selling early is usually selling at a meaningful loss to what they might receive if they held to the deal’s exit, which is the price of liquidity they were told upfront they did not have.

What this means going in

The lesson lands before the investment, not during it. The illiquidity of a syndication interest is one of its defining features, disclosed in every PPM and represented in every subscription agreement, and the secondary-sale difficulty is what that disclosure actually means: the investor is committing capital for the deal’s full life and should not invest money they might need before the exit. An investor who understands this treats the commitment as genuinely locked up. An investor who assumed they could get out if they needed to discovers, at the worst moment, that getting out means finding a scarce buyer, clearing the transfer restrictions, and accepting a discount.

The structuring consequence

For the investor, the secondary-sale reality is a reason to size the commitment carefully and only invest capital that can stay invested for the deal’s full term, because the option to exit early is expensive and uncertain, and the transfer restrictions plus the lack of a market plus the discount mean an early sale, if it happens at all, usually happens at a loss. For the sponsor, the transfer restrictions that make secondary sales hard exist for legitimate reasons, controlling who enters the deal, preserving the securities exemption, keeping the investor base coherent, but they should be disclosed clearly so investors understand the lockup they are accepting. The interest was always illiquid. The secondary sale is where that word is finally priced, and it is priced against the investor who needs to leave early.