Introduction
In June 2013, New Jersey's Division of Investment agreed to sell up to 25 real estate fund interests for 100% of their net asset value (NAV), about $925 million, when trade press put typical real estate secondary discounts at 15% to 20%. The update to the state's investment council shows the catch: 55% of each interest's price was payable at closing and 45% over four years, partly out of the portfolio's own distributions. The headline price was par. The cash was not.
That gap defines every deferred payment. A deferred bid bundles two transactions: a sale of fund interests at a quoted percentage, and a loan from the selling limited partner (LP) to the buyer for the unpaid part of the price. The private capital advisory (PCA) banker pulls them apart again, so the seller compares offers on cash-equivalent value and decides whether it wants to lend to this buyer at all.
How a Deferred Payment Works
A deferral splits the price into cash at closing and one or more fixed-date instalments. The price is still quoted against reference-date NAV and adjusted for calls and distributions as usual; only the timing of payment changes. Deferrals often carry no stated interest, so the buyer pays through a higher headline instead. An interest-bearing deferral keeps the headline nearer the cash bid and pays a coupon on the unpaid balance, which makes the trade-off easier to see.
- Deferred Payment (Secondaries)
The part of a secondary purchase price that the buyer pays on one or more agreed dates after closing. It usually earns a higher headline percentage of NAV than an all-cash bid, and until it is paid the seller holds a claim on the buyer, secured or unsecured depending on the purchase agreement.
Deferrals are common but short. Jefferies' review of 2024 found that 20% of LP transactions used one, lifting pricing by about 400 basis points on average against 100% cash at closing. Evercore's review of the first half of 2026 still calls upfront cash the market standard, with deferred balances typically settled within twelve months, so New Jersey's four years is long by current practice. The deferral is one line in the bid evaluation described in the LP portfolio sale process.
Why Buyers Offer to Pay Later
The structure works as seller financing. The buyer puts up less capital at closing, while the interests it now owns keep producing distributions that can fund the instalment. Its return on its own cash rises for the reason any leverage raises equity returns: part of the purchase is funded below the buyer's target return, a mechanism developed in leverage in secondaries.
Putting a Deferred Bid on a Cash-Equivalent Basis
Take interests carrying $240 million of reference NAV and two final offers. Bid A is 85% in cash, $204 million. Bid B is 90%, $216 million, half at closing and half twelve months later with no interest: $108 million now and $108 million in a year. In millions, at the seller's discount rate :
Setting that equal to 204 gives the break-even rate, the interest the seller implicitly earns by deferring:
| Seller's discount rate | Second instalment worth | Bid B worth | Share of NAV |
|---|---|---|---|
| 7% | $100.9m | $208.9m | 87.1% |
| 12.5% | $96.0m | $204.0m | 85.0% |
| 16% | $93.1m | $201.1m | 83.8% |
In substance this is an implied loan: the seller lends $96 million for a year and is repaid $108 million. Bid B wins whenever the seller's cost of waiting, including the chance of non-payment, is below 12.5%, a rate interviewers probing a deferred bid want alongside the present value. A listed seller's two-tranche sale is read the same way in pricing LP interests.
Choosing the Seller's Discount Rate
The rate starts from the seller's opportunity cost of capital, what the cash would earn or save if received today, plus a credit spread for the buyer, since the instalment is a promise. Accounting uses similar logic: under International Financial Reporting Standard 9 (IFRS 9), an interest-free long-term receivable can be valued at the market rate for a similar instrument with a similar credit rating. It should not be the buyer's target return, which prices the equity risk of the funds; a fixed instalment leaves that risk with the buyer. Matching rate to risk is the discipline behind choosing between a project discount rate and a company's WACC.
Buyer Credit and Security for the Deferred Amount
Until paid, a deferral is a claim on the buyer, often on a special purpose vehicle (SPV) whose main assets are the interests just bought. Cadwalader's fund finance group describes seller financing as a secured or unsecured deferral under the purchase and sale agreement (PSA); when secured, the seller typically takes security over the SPV's shares and the accounts receiving fund distributions. Unsecured, the seller ranks with the vehicle's other creditors, so the advisor checks whether a bank lending against the same interests would be paid first. Credit support can include:
- A guarantee from the buyer's main fund or parent.
- A letter of credit from a bank, payable on demand.
- An escrow or deposit held by a third party.
- Security over the SPV's shares and distribution accounts.
Stronger security usually comes with a smaller headline uplift, because the buyer prices its cost.
Earn-Outs, Collars, and Preferred Equity Structures
A deferral fixes the amount and moves the date. Other structured pricing tools make part of the price depend on what happens next, which helps when the parties disagree about the marks rather than timing:
- An earn-out pays the seller more if the portfolio distributes above an agreed level by a set date.
- A price collar holds the agreed percentage while the next quarter's NAV stays within a band of the reference NAV, and adjusts price or allows withdrawal outside it.
- A structured sale replaces part of the sale with senior capital, so the seller keeps a residual interest.
Company deals use earn-outs to bridge valuation gaps on earnings rather than fund distributions. Contingent value is safest counted at zero in the base case and valued separately.
- Structured Secondary Sale
A transaction in which a seller moves fund interests into a new vehicle and a buyer provides cash through preferred equity or a similar senior instrument, repaid first from distributions with a preferred return, while the seller keeps the residual and the upside above it.
A structured sale raises cash without crystallizing a discount on the whole portfolio. The price is the preferred return and the risk that the residual is worth little if distributions disappoint. The same Jefferies review put preferred equity at about 7% of secondary volume in 2024, and preferred equity and structured fund solutions covers the instrument.
Presenting Cash and Deferred Bids to a Committee
A seller's investment committee should see every final bid on one basis. From the earlier example, at illustrative rates and with a variant in which the same buyer offers a guarantee from its main fund:
| Bid A | Bid B, SPV only | Bid B, fund guarantee | |
|---|---|---|---|
| Headline (% of NAV) | 85% | 90% | 90% |
| Cash at closing | $204m | $108m | $108m |
| Deferred, due in 12 months | None | $108m | $108m |
| Obligor | Not applicable | Buyer SPV, unsecured | Buyer's main fund |
| Seller's rate applied | Not applicable | 11% | 7.5% |
| Cash-equivalent value | $204.0m | $205.3m | $208.5m |
The unsecured bid barely beats cash; the guaranteed one is worth about 1.9 points of NAV more. The sheet also separates the reported price from the cash: announcements and board minutes will carry 90%, while half the proceeds sit on the seller's balance sheet as a receivable until paid.
The row that is easiest to skip is the obligor. A deferral backed by a large fund and one owed by a new SPV can share a headline and dates, yet the second is an unsecured loan to a vehicle holding little beyond the interests just sold to it. A recommendation that holds up afterwards names who owes the money, what backs the promise, and the rate at which the seller agreed to lend.
