Why Secondary Funds Are Quietly Outperforming

While the venture capital world obsesses over which AI companies will deliver the next 100x return, secondary funds have been steadily building a track record that deserves serious attention from LPs rethinking their private markets strategy.

The Performance Story

Q2 2025 data shows secondary funds delivering a 6.24% one-year return, with five-year returns of 14.88% and ten-year returns of 11.36%. But here's what makes secondaries genuinely interesting: when you look at the most recent vintage years, they're dramatically outperforming both Fund of Funds and public markets on a risk-adjusted basis.

The 2022 vintage delivered 23.63% IRR with 1,536 basis points of alpha versus public markets. The 2023 vintage—admittedly very early—is posting a remarkable 30.86% IRR, significantly ahead of what was achievable in public equities during the same period.

Why Secondaries Are Working Right Now

The structural dynamics favor secondaries in the current environment:

Faster time to distributions: Unlike primary funds or FoFs, secondaries are buying into portfolios that are already 3-7 years mature. The 2016 vintage secondary funds have already delivered 1.19x DPI versus just 0.77x for FoFs from the same year. Real cash, not paper valuations.

Buying at discounts during dislocation: The 2020-2023 vintages benefited from purchasing LP stakes during periods of maximum uncertainty—COVID, the 2022 drawdown, and the ongoing liquidity crisis. When sellers are desperate, buyers with dry powder and conviction can extract significant discounts to NAV.

Reduced J-curve drag: By definition, secondaries skip the early deployment period where capital is called but companies aren't yet growing into their valuations. You're buying businesses that have already demonstrated product-market fit, with many approaching exit readiness.

The Consistency Advantage

Perhaps the most compelling insight is the relative consistency of secondary fund returns compared to traditional venture. Look at the standard deviation across vintages—secondaries show meaningful dispersion, but the bottom 5th percentile is substantially higher than you see in venture capital or even Fund of Funds.

The 2014 secondary vintage shows a median IRR of 13.75% with a relatively tight distribution. This suggests that picking a "good enough" secondary manager is easier than picking a top-quartile venture fund—a critical consideration for LPs who don't have the deal flow or relationships to consistently access the best GPs.

Where Secondaries Struggle

The data isn't uniformly positive. Secondaries lag public markets over certain horizons, particularly when comparing against the S&P 500 over three-year periods (underperforming by 1,619 bps). This suggests that in roaring bull markets, you'd be better off in passive equities.

The 2005-2007 vintages, which deployed into the pre-financial crisis bubble, show relatively modest returns (6-7% IRRs), demonstrating that secondaries aren't immune to market timing risk. If you're buying secondary interests at peak valuations with minimal discounts, you're not capturing the structural advantage that makes the strategy compelling.

Looking Ahead

With continued pressure on LP portfolios from denominator effects and a growing wall of assets seeking liquidity in the coming years, secondary fund managers are likely to find attractive buying opportunities through 2026. The data from recent vintages suggests that managers who can be selective and disciplined about selection can generate strong returns even in challenging environments.