The Other Shoe Will Drop: Anticipation Risk in Semi-Liquid Secondary Private Equity

Prepared by Mark Goldberg | March 25, 2026

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Executive Thesis

Apollo’s John Zito recently warned that private equity valuations of software companies may be materially overstated, stating that “all the marks are wrong.” He is not alone. Public markets have moved in the same direction: the IGV index, which tracks large-cap software companies, has declined approximately 30% from its September 2025 peak, reflecting a broad reassessment of software valuations. Private equity marks have not moved commensurately. Bain & Company’s Global Private Equity research similarly notes that technology valuations remain elevated relative to long-term norms despite public market corrections.

The more important question is not whether private equity software valuations are wrong. It is what happens if enough investors believe they might be?

Semi-liquid secondary private equity funds share a structural profile that has already produced a specific and observable outcome in private credit markets: anticipatory redemptions. Investors in semi-liquid private credit investment vehicles (BDCs and Interval Funds) did not wait for assets to reprice before seeking liquidity. They moved because they expected repricing to occur. That sequence is now playing out in those vehicles, and the conditions that produced it are present in secondary private equity as well.

This note examines why secondary PE funds may be the next structure to experience redemption pressure driven not by confirmed losses, but by declining confidence in reported valuations and why the structural opacity of these vehicles makes that risk particularly difficult for investors to assess or dismiss.

The Private Credit Precedent: Flows Preceded the Facts

The clearest evidence for anticipation-driven redemption risk is already visible. As anticipated and documented in research at Alternative Investments Market Intelligence as early as November 2025, redemptions in semi-liquid private credit funds did not begin because assets repriced. They began because investors anticipated that repricing was coming. As forecasted, approximately 80% of private credit investment vehicles are on track to reach maximum redemption limits by Q2 2026, despite the absence of broad asset-level write-downs.

This sequence matters because it establishes the mechanism. In semi-liquid private market structures, investor behavior does not wait for revised marks. It responds to weakening confidence in reported valuations. Once enough investors conclude that marks may not hold, withdrawal pressure emerges before any formal adjustment occurs and that pressure will become self-reinforcing.

Secondary private equity funds share the same structural features that made semi-liquid private credit vehicles vulnerable to this dynamic:

• Illiquid underlying assets

• Manager-determined valuations

• Limited look-through transparency for investors

• Periodic liquidity windows that concentrate withdrawal requests once confidence begins to weaken

The parallel is both structural and rooted in behavioral science.

Point 1: Software Is the Exposure, and It Is Large

Industry data from Bain & Company, PitchBook, Preqin, and McKinsey consistently identify technology (led by enterprise software) as the largest sector in global private equity, accounting for roughly one-third of buyout exposure. This is not a niche concentration. It is the single largest sector exposure in the asset class, accumulated over a decade of low-rate-driven buyout activity characterized by elevated entry multiples, growth-dependent valuations, significant leverage, limited tangible collateral, and exit assumptions tied to capital markets conditions that no longer fully apply.

Public markets have already begun to reflect a reassessment. The IGV index has declined approximately 30% from its September 2025 peak, signaling that investors in liquid markets have revised their view of software valuations. Private equity marks have not followed. That divergence while sustained, visible, and growing, is precisely the kind of signal that shapes investor expectations about where private marks will eventually go.

Secondary funds are particularly exposed to this concentration because of how they are constructed. They purchase existing fund interests and portfolios of seasoned assets, skewing toward mature, late-cycle investments acquired near peak valuations that have not yet exited, and toward continuation vehicles that retain companies viewed as long-term value drivers, which are frequently technology platforms.

The critical structural problem is that investors in semi-liquid secondary PE funds cannot determine their actual software exposure. These vehicles hold interests in private funds rather than companies directly. Filings reflect fund names, not business activities. An investor cannot look through the structure to assess what fraction of reported NAV is attributable to software holdings, what valuation assumptions support those marks, or how sensitive the portfolio is to a sector-level repricing. With software representing roughly 35% of PE broadly, the exposure in any given secondary portfolio could be substantial and there is no reliable mechanism for an outside investor to quantify it.

Point 2: Limited Visibility Accelerates the Dynamic

In most retail investment products i.e. mutual funds, ETFs, REITs, etc., investors can evaluate underlying exposures with reasonable precision. Publicly offered evergreen secondary private equity vehicles do not provide equivalent transparency.

Investors typically observe:

• Reported NAV

• Asset class and strategy allocation

• Geographic exposure

• Manager concentration

They generally do not see:

• Portfolio company identities

• Detailed sector breakdowns such as software as a percentage of the portfolio

• Revenue models or leverage profiles

• Exit assumptions

• Sensitivity to economic conditions

In the context of anticipation risk, this is a structural accelerant. When investors cannot independently assess whether reported marks are reasonable, they cannot disprove the concern. They cannot determine whether their fund has 10% software exposure or 50%. They cannot evaluate whether the valuations supporting current NAV are consistent with what public markets are signaling about the same sector. Uncertainty without visibility tends to resolve in favor of caution, particularly when credible market participants have raised the question publicly and a closely related market is already showing strain.

Limited transparency does not cause redemption pressure. It removes the information that might otherwise contain it. The response is both logical and emotional and it now has a recent and directly comparable precedent.

Point 3: The Anticipation Loop

Redemption pressure in semi-liquid secondary funds can emerge and intensify before any formal repricing takes place. Private asset valuations adjust with a lag relative to public markets. Investor sentiment does not.

Secondary funds represent one of the few available avenues for reducing private equity exposure in a semi-liquid format. If investors come to believe that reported marks are vulnerable to downward revision, the rational response is to seek liquidity before those revisions occur. Early movers capture available liquidity. Later movers face reduced fund flexibility, constrained portfolio management, and heightened sensitivity to market conditions, which validates the concerns that prompted the earlier withdrawals.

The loop is familiar. It played out in private credit. The conditions that produced it illiquid assets, manager-reported valuations, limited investor visibility, periodic liquidity windows are present in secondary PE funds, with the added dimension that the sector most implicated in the valuation concern represents roughly a third of the asset class, and investors have no reliable way to assess their specific exposure to it.

Point 4: The Discount Mechanics Are Not Protective, and New Investors Are Buying-in at Opaque Pricing

Secondary funds purchase existing fund interests at a discount to reported NAV. Current market discounts are running at approximately 15%. This is commonly understood as a margin of safety. It is not and the valuation treatment makes the problem worse, not better.

Consider the following:

• A PE fund reports NAV of $100

• The secondary fund purchases the interest at a 15% discount: $85

• The secondary fund carries the asset at fair value, typically aligned with the GP-reported NAV: $100

• The secondary fund books an immediate apparent gain of $15

Now consider that the underlying asset may be worth $50, a figure that is generous given the recovery estimates cited by Zito for lenders in distressed private software situations, which imply even greater impairment at the equity level if not $0.

The secondary fund paid $85. The asset is now presumed to be worth $50. The actual loss on purchase is $35. Yet the fund’s books show a $15 gain.

The consequence for new investors is direct. A retail investor buying into the semi-liquid secondary fund today does not pay $85. They buy in at the fund’s reported NAV, which reflects the $100 carrying value. They are paying a price that embeds the illusory gain, with no visibility into the purchase cost basis or the gap between reported value and potential economic value.

The discount that was meant to protect the secondary fund’s investors does not protect investors who enter the semi-liquid vehicle after the fact. It disappears into the fund’s accounting and re-emerges as reported performance making the vehicle appear more attractive to new capital at precisely the moment when underlying risk may be highest.

The chart below assumes a $1 billion fund deploying $200 million in new capital annually in $50 million quarterly tranches, purchasing secondaries at a 15% discount to the GP reported NAV, parameters consistent with the current market for semi-liquid secondary PE vehicles. The illustration isolates the structural costs embedded in a new investor’s entry into a representative semi-liquid secondary PE fund, holding all variables constant except those being examined.

I want to emphasize this is not a prediction of outcomes. Many of the underlying PE investments will generate real returns, and manager selection matters. The ability to identify top-tier sponsors and access their best vintages is precisely what justifies the management fee. The chart’s purpose is narrower: to identify, in isolation, the valuation methodology gaps, fee structures, and software concentration risk that a new investor absorbs at entry, before any operational performance is considered.

To understand what the chart reveals, consider the investor who entered the fund at inception at $10.00 par. Their account statement today shows $11.03 per share, an apparent return of 10.3%. That reported gain is real on paper. But it is also, in its entirety, the price the new investor pays on entry. The $1.03 accretion that the first investor books as a return is the same $1.03 the second investor overpays. The fund’s accounting has transferred value between investors without any change in the underlying businesses.

Starting from a reported NAV of $11.03 per share, each bar strips away one layer of the structural problem. The first deduction, $1.03 per share, is the accretion overpayment: the premium a new investor pays above true underlying value because the fund’s reported NAV has been inflated by discount mark-ups on prior purchases. The second, $1.75 per share, reflects unrecognized software impairment: if 35% of the portfolio is carried at twice its realizable value, that loss is already embedded in the entry price. The final two bars show management fees charged at 1.60% per annum on the reported NAV, $0.18 in year one and a further $0.71 over the following four years applied to an entry price that already includes both the accretion and the unrecognized loss.

Again, the chart assumes no change in the value of non-software holdings and makes no judgment about the ultimate performance of the portfolio. It is designed to answer a specific question: what does a new investor absorb structurally at the moment of entry, independent of manager skill or portfolio outcomes? The answer is a $3.66 per share gap between the entry price and the economic position implied by current valuation methodology and software concentration.

Point 5: The Redemption Price Problem

There is a further consequence that has received little attention. When an investor redeems from a semi-liquid secondary PE fund, they redeem at the fund’s reported NAV, in this illustration, $11.03 per share. But as the analysis above demonstrates, the economic value supporting that share may be materially lower. The fund must fund that redemption in cash.

That cash comes from one of three sources: new investor capital flowing into the fund, the liquidation of underlying assets at whatever price the secondary market will bear, or borrowings against a credit facility secured by assets that may be overvalued. None of these is benign.

If redemptions are funded by new investor capital, those investors are immediately subsidizing the exit of prior holders at a price that exceeds economic value. They are, in effect, paying $11.03 for something worth $7.37 and a portion of that premium is transferred directly to the investor walking out the door.

If redemptions require asset liquidation, the fund is forced to sell into a market where buyers have increasing visibility into the same valuation concerns that prompted the redemptions. Distressed sellers and informed buyers produce one outcome. The resulting transaction prices may then become observable data points creating the first independent marks that pressure the fund’s remaining reported NAV unless they choose to ignore secondary sale price as the indicator of value.  The SEC may have something to say in this regard.

If redemptions are funded by a credit facility, leverage increases against a potentially deteriorating asset base. The fund’s risk profile changes for remaining investors without their knowledge or consent.

In each case, the investor who moves first captures the reported NAV. The investor who moves last absorbs the adjustment. This is not speculation; it is the arithmetic of a semi-liquid structure where reported value exceeds economic value and liquidity is rationed. The experience of private credit semi-liquid vehicles confirmed that investors understand this sequence intuitively, even before it is formally acknowledged. The rational response, redeem before the marks move, is already playing out in private credit. The question for secondary private equity is not whether the same logic applies. It is whether investors will reach the same conclusion before or after the liquidity windows are capped.

Conclusion

Public markets have already repriced large-cap software companies materially, while private equity valuations remain largely unchanged. That divergence does not need to resolve to produce consequences. It only needs to persist long enough to alter investor expectations. Once confidence in reported marks weakens, behavior changes before accounting does.

The experience in semi-liquid private credit demonstrated that redemption pressure is not triggered by realized losses but by the anticipation of them. Investors move when they believe valuations are vulnerable, not when those valuations are formally revised. Secondary private equity funds share the same structural features that enabled that dynamic: illiquid underlying assets, manager-determined valuations, limited look-through transparency, and periodic liquidity windows that concentrate withdrawal requests once confidence begins to erode.

However, secondary funds introduce an additional structural feature that can amplify the effect. Interests acquired at a discount to reported NAV are typically carried at fair value aligned with the GP-reported marks, not at purchase price. As a result, reported NAV can incorporate immediate accounting gains that reflect valuation methodology rather than realized economic improvement. New investors enter at those marked values, while redeeming investors exit at the same reported NAV, even if underlying economic value is materially lower.

These funds also hold meaningful exposure to the sector most directly implicated by the valuation concern. New investors enter at prices that may embed both discount accretion and unrecognized impairment, while existing investors have limited ability to independently assess portfolio composition or sensitivity to repricing. Under such conditions, uncertainty does not dissipate. It accumulates.

Private credit revealed the symptoms first. Secondary private equity combines the same liquidity structure with exposure to the underlying assets now under scrutiny and a valuation framework that can widen the gap between reported and economic value. In semi-liquid vehicles, redemption pressure can emerge before any write-down occurs, and once it begins, it can reinforce the very concerns that prompted it. Early movers capture reported value. Later movers bear the adjustment.

The central risk, therefore, is not that private equity valuations will eventually decline. It is that investors will act as if they already have. When expectations shift ahead of marks, liquidity demand can precede price discovery, and the most consequential outcomes occur before the formal recognition of losses.

In that sense, the other shoe does not need to drop. Investors only need to move as if it already has. They will.

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Recommended Action for Investment Managers.  Read my earlier research note: Stress Test for Semi-liquid Vehicles - November 10, 2025. Written before the redemption caps in private credit were reached.  It outlined a course of action... before the private credit shoe dropped.