Secondary funds and continuation funds: how VC stakes change hands

A primary investment puts new money into a company or a fund. A secondary investment buys something that already exists. In venture capital there are two kinds. In a direct secondary, the buyer purchases shares in a startup from an existing holder, such as a founder, an employee with vested stock or an early investor, and the company receives no money. In an LP-led secondary, a limited partner (LP) sells its share in a venture fund to another investor.

Secondary funds are funds set up to make these purchases. They buy at a price that is often below the latest paper value, and hold until the company is sold or listed. For the seller, it means cash now. For the buyer, it means a stake in a company that is already built, with less waiting than a first-round investor.

A venture fund has a fixed life, often ten years, and its manager (the general partner, or GP) has to return the money by then. Sometimes the fund still holds a few promising companies that are not ready to be sold. A continuation fund is a new vehicle that buys those holdings from the old fund, so the GP can keep managing them for several more years.

Existing LPs are given a choice: take cash at an agreed price, or roll their share into the new vehicle. New investors, often specialist secondary buyers, put in the money that pays those who leave. Because the GP sits on both sides of the sale, buyers and LPs look closely at how the price was set.

A seller decides it wants liquidity and hires an adviser, or approaches a buyer directly. The buyer reviews the holdings, the latest valuations and the legal terms. The two agree a price and sign the papers, and the stake moves.

• Seller: an LP, a GP, a founder or an early investor wants cash before an exit.
• Pricing: the buyer offers a percentage of the latest net asset value (NAV), or of a startup's last round price.
• Review: the buyer checks holdings, fees, legal rights and the cap table.
• Consents: the fund's documents, the company's articles and, for a continuation fund, the LPs may all need to approve.
• Closing: money moves to the seller, and the stake is registered in the buyer's name.

NAV is the fund's own estimate of what its holdings are worth. A secondary buyer rarely pays full NAV for a venture stake, because the value is uncertain and the money is locked up. The gap between the price and NAV is called the discount.

Figures are indicative. Global reports have put venture LP stakes at roughly 10% to 25% below NAV in recent years, and some put them lower. One older report on Asia found Indian managers hoping to sell at about a 10% discount while buyers expected 30% to 40%, which shows how wide the gap can be. No current India-specific figure was found, so treat these as a guide only. The discount depends on how old the fund is, how good the holdings look, how much cash is expected to come soon and how many buyers are active.

The reasons are practical. An LP may need cash, or want to rebalance. A fund near the end of its life may have a few slow holdings that stop it from closing. A founder or employee may want to cash in some stock to buy a house, without waiting years for an IPO.

A GP may also prefer a continuation fund to selling a strong company early at a lower price, since the company may be worth more in a few years. LPs who want cash can leave, and those who believe in the company can stay. The discount is the price of getting money sooner.

As of November 2026, venture funds in India are alternative investment funds (AIFs) under SEBI's AIF Regulations, 2012. Category I and II AIFs are closed-ended with a minimum tenure of three years, and SEBI circulars of 2024 set how an AIF may wind up at the end of its term, including distributing holdings to investors in kind. No dedicated SEBI framework for continuation funds was found, and commentary in 2026 argues that one is needed, so the position may change.

Direct secondaries are governed by the Companies Act, 2013 and the company's articles and shareholders agreement, which may require consent or give other holders a right of first refusal. When the buyer is a foreign investor, FEMA pricing and reporting rules also apply. SEBI's co-investment framework of 2025 is a different tool and is not a secondary route.

In a primary round the company issues new shares and gets the money. In a secondary, existing shares change hands and the company gets nothing. That difference decides what the news means. A primary round extends a startup's runway. A secondary tells you what a buyer will pay for the shares and gives early holders cash.

A large secondary can also be tied to a primary round. Investors who lead a new round sometimes buy part of their stake from founders or early backers at the same price, so the founders take some money off the table while the company raises fresh capital. Read the split between new money and share purchases in the announcement.

A seller gives up future gains and may sell at a low point. A buyer takes on the risk that the holdings are worth less than the stated value, and may get limited information about the companies. In a continuation fund, the GP is both seller and manager of the buyer, so a conflict of interest is built in. Independent valuations and a clear vote for LPs reduce it.

Both sides should read the legal terms on transfer, tax and consent, including any right of first refusal held by other shareholders. This is general information, not investment, legal or tax advice, so check with a professional.

Slow IPOs and acquisitions have left many funds holding companies for longer than planned. Secondaries are one way to return cash to LPs, and a rising DPI helps a manager raise its next fund. For founders and employees, a secondary sale can offer liquidity without selling the company.

In headlines, words like secondary sale, partial exit, stake purchase and continuation vehicle describe this. A secondary round in a startup is not new money for the company, so it does not extend its runway. A reported valuation in a secondary may also be lower than the last primary round. This is general information, not investment or legal advice.