How fund-of-funds and secondary funds actually make money

Buying an LP stake at 85% of its reported NAV looks, at first glance, like an automatic 15% gain. It isn't — that discount is compensation for real risk and real time value of money, not a guaranteed profit margin. The institutions in thebuyer & fund directory that specialize in this strategy make money through a more disciplined combination of factors than "buy low, wait."

The discount has to clear a real cost of capital

A fund paying 85% of NAV today and waiting four years for that NAV to actually convert to cash distributions needs those distributions to exceed not just the 15% discount but also the fund's own cost of capital and required return over that period — a straightforward-looking discount can still represent a mediocre return if distributions arrive slower, or total less, than the NAV mark implied.

Diversification does real work

Secondary funds typically buy diversified portfolios of LP stakes across many underlying companies and fund vintages rather than concentrated single-asset bets, which meaningfully reduces the risk that any one disappointing outcome derails the fund's overall return — the same logic that makes a diversified index less risky than a single stock, applied to private fund positions.

Underwriting discipline separates strong performers from weak ones

Not every secondary fund manager prices deals with equal rigor. The strongest firms — many with decades of primary-fund performance data to draw on, like Adams Street Partners, founded in 1972 — use that history to more accurately estimate how a given GP's remaining portfolio is likely to perform, allowing more precise pricing than a newer entrant working from less data.

Fees and carry on top of the underlying return

Secondary fund managers themselves charge management fees and carried interest on the returns they generate for their own LPs — meaning the fund's own investors need the underlying discount- to-NAV strategy to outperform by enough to cover those costs too, not just to beat a raw break-even. This is the same fee-and-carry structure covered in SPV and continuation-fund mechanics, applied here at the fund-manager level rather than the single-deal level.

The bottom line

A discount to NAV is the starting point for a secondary fund's return, not the whole story — real, realized returns depend on distribution timing, diversification, underwriting quality, and fee drag all combining favorably. See how institutional LPs decide whether to sell or hold for the seller's side of this same calculation.