The Exchanges

Q Your time at UBS, how did you find your way into these nascent secondary markets?

A I started off in business strategy and fixed income, and then I was the chief operating officer of the global trade finance business. And somehow I ended up running a portfolio of e-commerce investments. When the banks were worried about the technology companies eating their lunch, they got together and they formed various platforms to transact their business on. For example, FX became FX All. U.S. government bonds became trade web. Off the back of that experience, I was asked to sell a portfolio of LP interests. It was about a two billion dollar portfolio, which had come together through M&A activity. UBS merged with Swiss bank and bought Payne Weber and Dylan Reed. Everyone had a few funds. When you put them all together, it was two billion. People said, wow. So I was given the job of selling them into the market. Which didn't really exist. So when I first found out there's only one advisor and they were a startup in Dallas called Cogent Partners. I Googled secondary buyers, came up with a number of names, and then ran a small auction in 2001. And then to remove most of the other funds, we actually executed a large structured billion dollar transaction with Harborvest Partners led by A young associate called Jeff Key, who is now one of the leaders of that business. It is amazing in this business, what they've achieved. We put together a transaction, which probably looks a lit…

AI assessment note: “Off the back of that experience, I was asked to sell a portfolio of LP interests.”

Q So let's break apart those two. You started talking about this original distressed interest from the LP and turns into more different use cases. How do you think about the breadth of why an LP does one of these transactions today?

A There's a number of reasons. It's usually strategic in a sense that it could be, I have non-core exposure. I'm not going to re-up with these particular managers. I would rather use that capital to That is invested in those managers right now and redirect it to core managers going forward. That's one reason. Sometimes it can be actually that it's core managers, but it's old funds. So I will sell my old funds to reinvest in the new funds so I can generate co-investment business. And old funds don't generate co-investment business. Many LPs these days have very active co-investment program, so they would do it for that reason. I think other reasons are strategically pivoting between buyout and venture and growth. So I might be overweight, buyout, maybe this is a great time in a market like this to be in growth. More relative value transactions are being executed these days, particularly with, I would say, public pensions who are over allocated to private equity compared to their benchmarks. So maybe they're supposed to have 15%, but actually there's very few distributions over the last few years. They may be at 20%. So there comes a time maybe to rebalance towards the benchmark they're supposed to be adherent to.

AI assessment note: “There's a number of reasons. It's usually strategic in a sense that it could be”

Q You mentioned early on that if an LP went to sell, they were looked at to say this is a separation, a divorce. What are some of the interesting dynamics that you see between LPs and GPs in the process of secondary transactions?

A There's been a big evolution over the last few years. Several years ago, a lot of LPs did not like continuation funds for a variety of reasons. Their concern was they are inherently conflict transactions and LPs generally don't like conflict transactions. However, I think a lot of LPs appreciated the industrial logic of why would you sell your best company, particularly to another GP, to a competitor, so you can watch them generate two to three times the money after you've generated. So that was a problem. That is the asset you don't want to sell. So if that transaction can be set up in a way that provides a fair option, To the selling LP at a fair price, then that would be a good transaction. So ILPA about a year ago issued updated guidance on continuation funds, and the key change in the guidance was the LPs in the selling funds need to be offered a status quo option. In other words, the option would mean economically, I mean, in the same spot as I am right now, which really means if that LP wants to continue being invested in the asset, their carried interest is not crystallized at the time. Effectively, it's held in escrow until the final determination of the company when it's finally sold. That change set the guardrails for the growth of this market.

AI assessment note: “Their concern was they are inherently conflict transactions and LPs generally don't like conflict transactions.”

Q Why don't you take me back to your upbringing and path to being in the seat?

A So I grew up in Sheffield, England, which is a northern industrial town. Many people will know it from the Full Monty. Which is, of course, a movie about male strippers who are redundant workers. I went to Newcastle University and studied politics, and then East Asian studies, and spent a year in China learning Chinese, which was very early. That was 1985. So that was many years ago. And got into banking, actually, commercial banking with a group called Standard Charter Bank, and moved to Hong Kong to work for them, and then ran a business in China. Which was actually a lot of fun. I enjoyed. In the south of China, in a city called Zhuhai, which was one of the original special economic zones. And I met my wife there and followed her back to the US. Needed something to do. Got an MBA. After my MBA, become a management consultant. And then eventually wound myself around through UBS and then Evercore to this seat.

AI assessment note: “eventually wound myself around through UBS and then Evercore to this seat.”

Q Through most of the early years of this, you said LP led transactions or some LP use case, they're going to the GP. At what point in time did the GPs get involved in initiating some of these secondaries?

A When I think of the first continuation funds, as we know them now, probably about 10 to 12 years ago, sometimes they're called zombie GPs, franchise challenge GPs. Some of the GP who had a portfolio, they were coming to the end of the fund, they were what you would say under the pref, so they were not going to generate any profits. But the assets still needed to be managed, there was some upside on them, so The GP will go to the advisory board and say, I'd like to issue a secondary transaction. So I sell my portfolio into a new fund and we'll reset the fees and carry. If you're an existing LPs, you could just roll into this new fund on your existing terms. But for those who want to sell any new investors who would come in, they would pay the new fees to motivate and incent the GP. That was about 10 years ago. If I bring that forward to today, These are the best GPs with their best assets, leveraging the secondary market for a number of reasons. Often it's a single company continuation. This is often their crown jewel, trophy asset, where in the past, a managing partner may have to sell their best assets to generate liquidity, to get DPI back to the investors so they could raise their next fund. A continuation fund allows them to achieve most of those objectives, To keep a hold of their best assets, to generate the next leg of growth and return for their own investors, while at …

AI assessment note: “probably about 10 to 12 years ago, sometimes they're called zombie GPs”

Q When you look at the buying side of this market, what is the composition of the buyer base when you map that to transaction volume?

A Mostly it's still large, dedicated secondary groups, Alpinvest, Lexington, Carla, strategic partners, Harborvest, and the like, who have raised large funds that can invest both in the LP market and the GP market. And that is still, in terms of the buyer base, the majority of the market. In addition to that, there are dedicated groups who just focus on LP transactions. And those who are just focused on GP transactions, the growth of the market over the last few years has been on dedicated GP transactions. So what we're seeing right now, I would say a fairly new development is traditional buyout managers actually looking to set up their own secondary funds, just focused on investing in single asset continuation funds. And some of these GPs, particularly those who get a meaningful Part of their deal flow from other GPs will look at this as a hedge on their core business and an opportunity. And if one takes a position going forward that in the sponsor to sponsor channel, a lot of the really best companies actually won't be in the sponsor to sponsor channel. They'll be in the sponsor to continuation fund channel, which was around 10% of exits last year. Then these managers will take the view if my job Fundamentally, is to get exposure to the best companies for my LPs, even though the majority will still be through my main fund, then I need a pocket where I can still get exposure to …

AI assessment note: “Mostly it's still large, dedicated secondary groups, Alpinvest, Lexington, Carla, strategic partners”

Q How did it evolve from that in that period of time as you built this advisory business at UBS?

A There's a few catalysts. Definitely, world financial crisis was one, because then a lot of LPs had to sell. Probably remember you went from the years, 2004, five, six, seven, where LPs made somewhat unprecedented commits on private equity, and then the economy fell off a cliff, and there was a challenge funding a lot, particularly endowments and foundations who are way overweight private equity. There was a big concern they couldn't meet the capital calls. So, During that time, we worked with endowments and foundations, and the principal reason for the transaction was to remove unfunded exposure that they were concerned they could not fund. And during this period, public pension funds, in addition to banks and others, were sellers. On the back of that, it became more usual and more normal to be a seller in this market. As a result of that, a momentum developed where it was okay to sell, And selling was not just about being distressed. It wasn't just about removing non-core exposure. You could actually use the secondary market strategically to reposition your portfolio and think about it in terms of more of a relative value transaction. I can sell these funds at a certain price. I can reinvest into this exposure and perhaps get a better return. So I think during that time, The development of the secondary market and the sophistication probably matched the development of LP sophi…

AI assessment note: “There's a few catalysts. Definitely, world financial crisis was one”

Q The size of this market, you're talking about a hundred billion dollars. There's so much more in just private equity alone. How do you think about this mechanism as providing liquidity for a much, much larger industry?

A The secondary market is around two percent of outstanding AUM. In some ways it's hardly a secondary market at all. I think that the change will be the amount of capital being raised by secondary funds right now. We've seen a couple close this year in twenty two billion, there's others talking even north of that. Plus, I think when the new entrants I've just identified, the types of group that start their secondary funds just focused on single asset continuation funds, then we anticipate the syndicate market for these transactions will grow rapidly, because you'll have well-known GPs entering the market with their secondary funds. Their investors are used to co-investing with them, and it comes with their mark of approval on the transaction. Plus, they're working with their secondary fund partners who may be already existing investors in their fund. So I think that accelerates this market. In some ways, it could supersize it in the relatively short term, short term being three to five years.

AI assessment note: “The secondary market is around two percent of outstanding AUM.”

Q What are some of the critiques, concerns you see from the LP side?

A I think from the LP side is to make sure there's a robust process. What was the price discovery process? Who was involved? And what information were they provided with? I think from an LP's perspective also, have I been provided with the same information? Do I have the same information to be able to evaluate the transaction? Because I don't know at this point if I'm a seller or a buyer. I think that's pretty important. Also, giving the LPs enough time. And a good heads up. LPs don't like surprises. So you need to start with, as a GP, telling them why you're doing this, and that you're only going to execute this transaction if it makes sense for them. Springing these transactions with little time on LPs doesn't end well.

AI assessment note: “make sure there's a robust process. What was the price discovery process?”

Q And then if you put the hat on the other side, which is you're advising someone who wants to pick up these assets through the fullness of time, different cycles, what have you seen as the practices of the best buyers of secondary assets?

A The first thing is that having a real relationship with actually the advisor, whoever it is, is actually pretty important because it's very important that we understand that your bid is good and that you're trustworthy, and we believe you can get to the finish line. So having that relationship with the advisor, I think, is pretty important. Also being pragmatic on documentation on the purchase and sale agreement and things like that, and being able to move pretty quickly. So Understanding what your limits are. Understanding where you walk away on price. And my experience over time is that in terms of pricing, if a deal is good at 86 cents on the dollar, it's usually good at 88 too. I've seen buyers walk away for a point. I'm pretty confident wouldn't have made a difference. So for us, understanding how they think about the market and the fact they have the capacity to transact is pretty important.

AI assessment note: “having a real relationship with actually the advisor, whoever it is, is actually pretty important”

Q As you look at the market today, which is north of a hundred billion dollars annually and growing, how do you bring these buyers and sellers together?

A Our job really is on price discovery. A GP driven transaction is really price and terms discovery. Like an LP transaction is really about price. Our job is to run the auction process to get best price for the LP. And what that can mean in this market has become more sophisticated. Is the best price for each asset. So if the portfolio, for example, consists of a buyout venture, real estate, infrastructure, we want to find the best price for each particular asset or each particular asset class. The development of the secondary market means there's dedicated infrastructure secondary buyers, dedicated venture buyers, dedicated buyout buyers, and dedicated private credit secondary buyers. So trying to fix that puzzle just so we generate the best price is the importance of an advisor in this market. On the GP side, given that the GP is conflicted in that on both sides of the transaction, having an honest broker between to make sure the best price is achieved for the selling LPs and terms are appropriately set by the market is really our role there to make sure it is a fair transaction.

AI assessment note: “Our job is to run the auction process to get best price for the LP.”

Q If you look at your business today, so you have a hundred people, very significant player. What does it mean when you own effectively the middleman of the business like this, as you guys do today?

A This is an information business, and the more you're in the market, the more valuable you are to your clients. So if it's a GP client, our visibility on price and terms is second to none. So we're advising a client, we'll tell them exactly where we can come out. And on the LP side, we'll have pretty good visibility where pricing will come out, what's the art of the possible, who's bought what, who's just missed the transaction, where the appetite is. So I think that information is pretty important. So when we think of any advisor, I think in any market, the more information you have, the more insights you can have, the more value you are to your clients. So it becomes, I think, a bit of a self-fulfilling prophecy.

AI assessment note: “This is an information business, and the more you're in the market, the more valuable”

Q If someone was sitting in your seat and seeing all of the transactions that happen, all the ways GPs are behaving, all the ways LPs are behaving, what are some of your favorite stories of either good practices or bad practices?

A For a GP-driven transaction, the rationale's got to be there for why you're issuing a continuation fund, and usually that's got to be, there's a lot of upside in the asset. We want to keep a hold of it. There needs to be growth capital, and we are aligning ourselves with that transaction in terms of the amount of capital we are putting it as GP. The transactions that are less favorable to the market is where there's been a failed sell side on that company. And then, oh, that sell side failed. Why don't we do a continuation fund? Now, the market figures that out pretty quickly. So it isn't a transaction for underperforming or failed assets. So when we see situations like that, we look very carefully. It's not a distressed market. The clue is in the term continuation fund. So you're trying to continue what is being done. If the transaction is being set up to go into a new type of business or a big acquisition, That's not great. These are not turnaround stories. So these should be a very successful company that is growing. And really that should be maybe 10% of your portfolio. So sometimes when I get asked the question from a GP, how many of these do you think I can do? The answer from me usually is, well, how many companies are worth it? As the market develops, obviously you get certain practices that are less favorable. Ultimately though, these are alignment transactions. Is a n…

AI assessment note: “The transactions that are less favorable to the market is where there's been a failed”

Q What are the things that raise your alarm bells or that you've seen that one side or the other may not be as familiar with that does happen in the market?

A I've referenced some of them where, for example, a GP is a surprise when a transaction comes to another. That's never a great thing. Or perhaps full transparency is not being provided of what's going on in a portfolio company. We have seen situations like that might happen recently. It's more things like sharing of information, of folk being economic with the truth in certain situations. So that is what I see as more problematic. Secondary investors invested in multiple GPs. They can often triangulate these things between different GPs. They are their relationships, and they rely on them, so I think the times where things go well, I think is a vast, vast majority, and there's very, very little litigation, if any, that I've seen in the secondary market in 20 years.

AI assessment note: “perhaps full transparency is not being provided of what's going on in a portfolio company”