PE Exit via the Secondaries Market: LP Stake Sales and GP-Led Restructuring Transactions

The secondaries market has transitioned from a niche liquidity tool to a primary exit channel for private equity sponsors in Asia, driven by a structural overhang of unrealised assets and a persistent bid-ask spread that has compressed only selectively. According to Evercore’s 2025 Secondary Market Review, global secondary transaction volume reached USD 152 billion in 2024, up 43% year-on-year, with Asia-Pacific accounting for approximately 12% of that total — a share that has doubled since 2020. For Hong Kong-based GPs managing funds governed by the SFC’s Code on Unit Trusts and Mutual Funds (Chapter 571), the shift is not merely opportunistic but increasingly necessary: the average holding period for buyout-backed portfolio companies in Greater China now exceeds 6.5 years, per Preqin data from Q1 2025, compared to a historical norm of 4-5 years. Regulatory developments, including the HKMA’s Guideline on Private Equity Investments (December 2023) which clarified capital treatment for fund-of-funds and co-investments, have further legitimised secondaries as a portfolio management tool. This article dissects the two dominant transaction structures — LP stake sales and GP-led restructurings — with specific reference to Hong Kong’s legal and regulatory framework, pricing mechanics, and the operational considerations that determine execution success.

The LP-led Secondary: Mechanics, Pricing, and the Hong Kong Regulatory Context

The LP-led secondary transaction, in which a limited partner sells its entire fund interest or a portion thereof to a buyer, remains the most straightforward structure in the secondaries market. For Hong Kong-based LPs — including family offices registered under the SFC’s Type 9 (Asset Management) licence and institutional investors subject to the HKMA’s Investment Guidelines for Exchange Fund — the decision to sell is rarely driven solely by liquidity needs. It is increasingly a function of portfolio concentration risk, NAV-based leverage covenants, and the desire to rebalance vintage exposure.

Pricing dynamics and the NAV discount. The primary pricing mechanism for LP stake sales is the net asset value (NAV) as of a specified date, adjusted for subsequent distributions and recallable capital, with a discount applied to reflect the illiquidity of the underlying assets. In the Asia-Pacific market, discounts for LP stakes in buyout funds closed between 2018 and 2022 averaged 18-22% of NAV in H2 2024, according to data from Setter Capital’s Volume Report 2024. This compares to a 14-16% range for similarly vintage funds in North America. The wider discount in Asia reflects several structural factors: lower transparency around portfolio company valuations in jurisdictions such as China and India, longer exit timelines, and a smaller buyer pool. For a Hong Kong-based LP selling a USD 50 million commitment in a 2019-vintage Asia buyout fund, a 20% discount implies a sale price of USD 40 million — a haircut that must be weighed against the opportunity cost of holding the position for another 2-3 years.

Transfer mechanics and the SFA framework. The transfer of a partnership interest in a Hong Kong-domiciled fund is governed by the terms of the limited partnership agreement (LPA) and, where the fund is structured as an onshore vehicle, the Limited Partnership Fund Ordinance (Cap. 637). The LPA typically requires the GP’s consent for any transfer, and the GP may impose conditions including the buyer’s qualification as an “accredited investor” under the Securities and Futures Ordinance (Cap. 571). For cross-border transactions where the fund holds PRC assets, additional approvals may be required under the Foreign Investment Law of the PRC (2020) and the Administrative Measures for Foreign-Invested Limited Partnership Enterprises (2023). The SFC’s Code on Real Estate Investment Trusts (Chapter 571) is not directly applicable, but the Code on Unit Trusts and Mutual Funds provides guidance on valuation and disclosure for funds that are SFC-authorised. Most secondaries transactions in Hong Kong, however, involve unlisted funds that fall outside the SFC’s direct authorisation regime, placing the onus on the buyer’s due diligence.

Tax considerations for Hong Kong LPs. The Inland Revenue Ordinance (Cap. 112) provides a tax exemption for profits derived from the sale of “specified foreign assets” by a qualifying corporate treasury centre, but the sale of a partnership interest is generally treated as a capital transaction unless the LP is deemed to be trading. For Hong Kong-based family offices, the Unified Fund Exemption (Section 20AN of the IRO) — introduced in 2019 and expanded in 2023 — exempts profits from the sale of “qualifying investments” by a qualifying fund, provided the fund is not a “special purpose vehicle” and the transaction is not part of a trade. The sale of an LP stake in a private equity fund is treated as a disposal of an interest in a partnership, which is a qualifying investment under the exemption, but the fund must be “authorised” by the SFC or satisfy the “central management and control” test. Practitioners advise that the tax analysis should be completed before entering into a sale agreement, as the characterisation of the transaction — capital gain versus trading profit — can materially affect the net proceeds.

GP-led Restructurings: Continuation Vehicles, Strip Sales, and the Role of the Hong Kong Sponsor

GP-led restructurings have become the dominant transaction type in the secondaries market by value, accounting for approximately 58% of global secondary volume in 2024, per Evercore’s data. In Asia, the proportion is lower — around 35% — but growing rapidly as sponsors seek to extend hold periods for high-performing assets without forcing a full fund realisation. The structure typically involves the GP forming a new vehicle — a “continuation fund” — to acquire one or more portfolio companies from the existing fund, with existing LPs given the option to roll over their interest or cash out.

The continuation vehicle structure. In a typical continuation vehicle transaction, the GP establishes a new Cayman Islands or Bermuda exempted limited partnership — the continuation fund — which issues new partnership interests to rolling LPs and new investors. The existing fund sells its stake in the target portfolio company to the continuation fund at a price determined by a third-party valuation. The GP’s carried interest is typically reset to zero in the new vehicle, and a new incentive structure is put in place. For Hong Kong-based GPs, the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 571) requires that any transaction involving a conflict of interest — which a GP-led restructuring inherently is — be conducted on arm’s-length terms and with full disclosure to all LPs. The SFC’s Management, Supervision and Internal Control Guidelines for Licensed Corporations (December 2023) further mandates that GPs establish a conflicts committee or appoint an independent advisor to oversee the process.

Pricing and the role of the independent valuation. The valuation of the portfolio company in a GP-led restructuring is the single most contentious issue. The GP, as the seller, has an incentive to maximise the price to generate a higher carry in the new fund, while the buyer — typically a secondary fund — seeks a discount to reflect the illiquidity and risk of the asset. The solution is an independent valuation conducted by a qualified valuer, often a Big Four firm or a specialist valuation advisor, in accordance with the International Private Equity and Venture Capital Valuation Guidelines (IPEV, 2022 edition). The valuation must be supported by a detailed financial model, including projections of revenue, EBITDA, and net debt, and must be stress-tested under multiple scenarios. For Hong Kong-domiciled funds, the Companies Ordinance (Cap. 622) and the Limited Partnership Fund Ordinance do not prescribe specific valuation methodologies, but the SFC’s Code on Unit Trusts and Mutual Funds requires that the valuation of fund assets be “fair and reasonable” and be performed by a person “independent of the management company.” In practice, the independent valuation report is shared with the LP advisory committee (LPAC) and, in some cases, with all rolling LPs.

LP rollover economics and the “cash-out” option. The critical decision for LPs in a GP-led restructuring is whether to roll over their interest into the continuation fund or to cash out at the transaction price. Rolling LPs receive units in the new fund, which typically has a longer term (3-5 years) and a reset carry structure. Cashing out LPs receive a cash distribution equal to their pro-rata share of the sale proceeds, net of any transaction costs and management fees. The economics of the rollover depend on the expected return of the continuation fund relative to the cash-out price. If the continuation fund is expected to generate a 2.0x multiple on invested capital (MOIC) over 4 years, a rolling LP with a USD 10 million stake would receive USD 20 million at exit, versus a cash distribution of USD 10 million today. The decision is further complicated by the fact that rolling LPs typically pay management fees on the new fund (often 1.0-1.5% of NAV) and carry (20% above a 8% hurdle), while cashing out LPs avoid these costs. For Hong Kong-based family offices, the tax treatment of the rollover — whether it constitutes a disposal for capital gains tax purposes — must be analysed under the Inland Revenue Ordinance.

Structuring Secondaries Transactions for Hong Kong-Domiciled Funds

The choice of fund domicile materially affects the structuring of secondaries transactions. Hong Kong-domiciled funds — whether structured as limited partnerships under the Limited Partnership Fund Ordinance (Cap. 637) or as unit trusts under the Trustee Ordinance (Cap. 29) — present specific legal and regulatory considerations that differ from Cayman Islands or Delaware vehicles.

The LPF Ordinance and transferability of interests. The Limited Partnership Fund Ordinance (Cap. 637), effective from August 2020, provides a statutory framework for Hong Kong-domiciled private equity funds. Section 21 of the Ordinance permits the transfer of a limited partner’s interest subject to the terms of the partnership agreement, but the transfer does not release the transferring LP from liabilities incurred prior to the transfer. For LP stake sales, the buyer must be registered as a limited partner in the LPF register, and the GP must file a notice of change with the Companies Registry within 15 days. The Ordinance does not impose a minimum holding period, but the SFC’s Code on Unit Trusts and Mutual Funds (where applicable) may require that the buyer be a “professional investor” as defined in the Securities and Futures Ordinance (Cap. 571, Schedule 1, Part 1). For GP-led restructurings involving an LPF, the GP must consider whether the transfer of assets from the existing fund to the continuation fund constitutes a “disposal of the whole or substantially the whole of the fund’s undertaking” — a trigger event that may require LP consent under the LPA.

Cayman Islands versus Hong Kong for continuation vehicles. While Hong Kong’s LPF framework is increasingly popular for primary fund formation, continuation vehicles for GP-led restructurings are overwhelmingly domiciled in the Cayman Islands or Bermuda. The reasons are twofold: first, the Cayman Islands Exempted Limited Partnership Law (2024 revision) provides greater flexibility around the reset of carried interest and the issuance of different classes of partnership interests; second, the Cayman courts have a well-established body of case law on fiduciary duties and LP rights, which provides legal certainty for complex transactions. For Hong Kong-based GPs, the decision to use a Cayman continuation vehicle does not eliminate Hong Kong regulatory oversight: the SFC’s Code of Conduct applies to the GP’s activities regardless of the fund’s domicile, and the Money Laundering and Terrorist Financing Ordinance (Cap. 615) imposes customer due diligence obligations on the GP when accepting new investors into the continuation fund.

The role of the Hong Kong sponsor and the “sponsor-led” model. In some GP-led restructurings, the GP does not act alone but partners with a secondary fund that provides both capital and structuring expertise. This “sponsor-led” model is particularly common in Asia, where the secondary buyer — firms such as Coller Capital, HarbourVest, or Ardian — effectively underwrites the transaction. The sponsor conducts its own due diligence on the portfolio company, negotiates the valuation, and provides a backstop commitment for the cash-out portion. For Hong Kong-based GPs, engaging a sponsor early in the process — before the formal LPAC vote — can reduce execution risk and provide a credible independent price. The SFC’s Code of Conduct requires that the GP disclose any arrangement with the sponsor that could give rise to a conflict of interest, including any fee-sharing or co-investment rights.

Market Trends, Pricing, and the Outlook for 2025-2026

The secondaries market in Asia is entering a period of structural growth, driven by the maturation of the region’s private equity industry and the increasing sophistication of its investor base. Several trends are shaping the 2025-2026 outlook.

The “denominator effect” and LP liquidity needs. The denominator effect — where a decline in public market valuations causes private equity allocations to exceed target percentages — has been a persistent driver of LP stake sales since 2022. For Hong Kong-based institutional investors, including the Exchange Fund and the Mandatory Provident Fund (MPF) schemes, the rebalancing pressure has been acute. The HKMA’s Annual Report 2024 noted that the Exchange Fund’s private equity allocation stood at 8.7% as of December 2024, above the 7.5% long-term target, and that the fund had increased its secondary market sales by 35% year-on-year to reduce the overweight. For MPF trustees, the Mandatory Provident Fund Schemes Ordinance (Cap. 485) does not prescribe a specific allocation limit for alternative assets, but the Code on MPF Investment Funds (Chapter 485) requires that the fund’s investment policy be consistent with its stated risk profile. The trend is clear: LPs are sellers, and the secondaries market is the primary mechanism for reducing exposure.

Pricing compression and the bid-ask spread. The bid-ask spread for secondaries transactions in Asia has narrowed from approximately 25-30% of NAV in 2022 to 18-22% in 2024, according to Setter Capital. The compression reflects increased competition among secondary buyers — the number of dedicated secondary funds globally reached 87 in 2024, up from 62 in 2020 — and greater transparency around portfolio company valuations. However, the spread remains wider than in North America (14-16%) and Europe (12-15%), indicating that the market is still inefficient. For GP-led restructurings, the pricing is typically closer to NAV — 95-100% of NAV for high-quality assets — because the transaction is structured as a sale of a single asset rather than a portfolio of assets. The IPEV Valuation Guidelines require that the valuation be based on “fair value” as defined under IFRS 13, which for a single-asset continuation vehicle often results in a price close to the most recent carrying value.

Regulatory tailwinds and the SFC’s “Open-ended Fund Company” regime. The SFC’s Open-ended Fund Company (OFC) regime, introduced in 2018 and expanded in 2024 to include private equity funds, provides a potential vehicle for secondaries transactions. An OFC can issue and redeem shares on a continuous basis, which could facilitate LP stake sales without the need for a secondary market transaction. However, the OFC regime has seen limited adoption for private equity funds — only 12 OFCs had been registered for private equity purposes as of March 2025 — due to the requirement that the fund’s assets be valued at least monthly and that redemptions be processed within 60 days. For illiquid assets such as private company stakes, the monthly valuation requirement is operationally challenging and may not align with the IPEV guidelines. The SFC’s Consultation Paper on the Proposed Enhancements to the OFC Regime (January 2025) proposes to relax the valuation frequency for private equity OFCs to quarterly, which could make the regime more attractive for secondaries transactions.

The “stapled” secondary and the Hong Kong IPO pipeline. A specific transaction structure gaining traction in Asia is the “stapled” secondary, where the sale of an LP stake is combined with a commitment to invest in a new fund managed by the same GP. For Hong Kong-based GPs with a strong IPO pipeline — particularly in the healthcare, technology, and consumer sectors — the stapled secondary allows the GP to raise new capital while providing liquidity to existing LPs. The HKEX Listing Rules (Chapter 18C) for specialist technology companies, effective from March 2023, have created a potential exit channel for PE-backed companies, and several GP-led restructurings in 2024 included a “pre-IPO” component where the continuation fund was structured to hold the asset until a listing. The SFC’s Code of Conduct requires that the GP disclose any pre-IPO arrangements to LPs, including any lock-up agreements or price protection mechanisms.

Actionable Takeaways for Market Participants

1. For LPs evaluating a stake sale: Commission an independent valuation of the fund’s underlying assets using the IPEV 2022 guidelines, and compare the offered discount to the Setter Capital Asia-Pacific benchmark of 18-22% of NAV for 2018-2022 vintage funds, adjusting for sector and geography.

2. For GPs considering a continuation vehicle: Engage an independent legal advisor to structure the transaction under the Limited Partnership Fund Ordinance (Cap. 637) or Cayman Islands law, and obtain a conflicts committee opinion to satisfy the SFC’s Code of Conduct requirements on arm’s-length dealing.

3. For secondary buyers: Conduct a full tax due diligence under the Inland Revenue Ordinance (Cap. 112), including the Unified Fund Exemption (Section 20AN), to confirm that the acquisition of the LP interest or the continuation vehicle units qualifies for the profits tax exemption.

4. For family offices and institutional investors: Review the HKMA’s Guideline on Private Equity Investments (December 2023) to ensure that any secondary market transaction — whether as buyer or seller — complies with the capital treatment and reporting requirements for fund-of-funds and co-investments.

5. For all parties: Document the transaction timeline and the LPAC approval process in detail, as the SFC’s Management, Supervision and Internal Control Guidelines (December 2023) require that GPs maintain records of all conflict-of-interest transactions for a minimum of seven years.