The Exchanges

Q So you've had this environment with rates dropping from sky high in the eighties to until recently next to nothing. And that has that benefit of valuations rising. How do you respond to that critique? Of, well, private equity smooths their marks, their marks are too high, there's not much happening in deal volume because of that.

A So I think there's one narrative that I hear a lot in private equity that I struggle with, and that is that private equity valuations are opaque, they're irrational, and particularly in times when public markets decline and private equity doesn't fall. So we spent a lot of time on this. What we did was we went back to 2005 to 20 22, and we looked at over a thousand companies, and we asked ourselves, when a private equity company exit, what does it exit at relative to what it was carried at two quarters prior? And the answer is, it pops 28%. So there is a 28% gain at exit, which suggests that private equity is undervalued, not overvalued. So, people have said, okay, that's on average for 15 years, but what does it mean, like, year over year? Because there's got to be good years and bad years, and actually, if you disaggregate it by vintage year, what you're seeing is that it's incredibly consistent between 20 and 30% from 2010 to 20 22. Then people are like, yeah, but maybe the winners get a big pop, but the laggers, they must be sold at a discount or less in value, and actually, we disaggregated it, and yes, there is a Success bias for companies that have been held less than particularly two years, but less than four years, because GPs haven't been able to value the company at the pace in which the value was increasing, otherwise LPs, and maybe the market would be skeptical. Bu…

AI assessment note: “which suggests that private equity is undervalued, not overvalued.”

Q How do you think about the portfolio that you put together for your LPs?

A Diversification, diversification, diversification. So in the objective of generating resilient returns, muted volatility, consistent cash flows, First port of call is diversity. Diversity by asset, by sector, by geography, by vintage, by duration, by GP. Then the second port of call is quality. We're really looking to deal with quality GPs that have had experience through cycles. It generally puts us towards the larger end of the market. We can have a debate as to whether or not they generate the best returns. I would suggest that they have a good opportunity to do that. Either way, they're very consistent in the way that they generate their returns. And if you think about what we're trying to do around consistent returns, that's our focus. Diversify portfolios so that we can provide that consistency with muted volatility. And then the last part is our structure. So what we do, as you kind of heard, we essentially give 60 to 70% of the value of the portfolio taking a hundred percent of cash flows, so we're one and a half times asset coverage day one. From our perspective, we've got the combination of diversity, high quality, structure, and the combination of those three things provides us what we hope is portfolio construction. Then we have a whole team called portfolio construction that is looking at our funds as they're getting invested, and they're saying, okay, well, we hav…

AI assessment note: “we've got the combination of diversity, high quality, structure”

Q You've been at this for a decade. What do you think's the bottleneck in why the secondary market is, say, only one percent of private equity volume today?

A So it's been capitalization, and it's been resources. Let's go through the history of the secondary market. 2001 to 2011, the decade of institutionalization. It went from five billion to twenty five billion during that decade. Most of it was just LP secondaries. That was it. 2011 to twenty-twenty-one, it went from twenty-five billion to 125,000,000,132 to be exact. Another five times growth. But during that decade, it was the decade of innovation. We went from just having LP secondaries to having private credit secondaries, real estate secondaries, infrastructure secondaries. You had single asset continuation fund, multi-asset continuation fund. You had preferred equity. You have NAV lending all in one decade. So we got to one hundred and twenty five billion. But what that has done, it's left the secondary market long opportunity and short capital. There is not enough capital to absorb the pent up liquidity in this market. So we see 21 to 31 is a decade of capitalization. Generally speaking, what happens is that capital lags opportunity. If you're out in the market right now, there's really two areas where LPs are looking to allocate private credit and secondaries. It's the talk of the town. So you know that just institutional market, it was Seventy billion raised in twenty-twenty-one. Can it grow seven times to 490 by twenty-thirty? It did. That gets you to five hundred billio…

AI assessment note: “So it's been capitalization, and it's been resources.”

Q So how'd you get from A to B?

A Interestingly enough, it all started on a co-op term, a co-op term that I had where I ended up in investment banking. I didn't know what investment banking was. I showed up the first day with an earring in my ear. I had khaki pants on and a sailor jacket, which is basically a suit jacket with gold buttons. The individual that I first sought brought me into the office, and they basically said, you're going to have to take that earring off to work in investment banking. And I said, really? Because I've had that for a couple of years, and this is late nineties, so this was a very different era. He said, yeah, I don't know what to tell you. You got to take that earring off to work in investment banking. So I took the earring off. Two, three days later, brings me back into the office, and he's like, just so you know, you're wearing khakis and a sailor jacket with gold buttons. I think you think you're wearing a suit, but you're not wearing a suit, and everybody's noticing, so you should go buy yourself a suit. And I was like, I don't have the money to buy a suit. And he's like, here's 200 bucks. Go buy yourself a suit and come back to the office. So off I went, and that was my investment banking opportunity. Which was a very eye-opening experience.

AI assessment note: “it all started on a co-op term that I had where I ended up”

Q How did you decide that you were ready to leave CPBIB and start Dawson?

A It had been 14 years. I had had a great run. I was turning 40. I was getting, I think, at a point in time where I was increasingly less inspired, not because of the organizations, because they always have a special place in my heart. I just needed change. And so, it took two to three years for me to kind of just go through that gestation period, because you can have good days and bad, and then you go through a period of time like, okay, that three months wasn't as fun as the last three months. But once you start getting to a point where you're just like, hmm, it's been six to nine months, and I'm feeling less inspired, and then you have to take a year or a year and a half to actually build the conviction to go out and do it. And where it really came to be was this infamous bike ride that I took from Whitehorse Yukon to Fairbanks, Alaska, and the midpoint of the journey was Dawson. And so on this infamous bike ride, it's about a thousand miles, I was sleeping on the side of the road, The Arctic has a special place in my heart. And essentially, that's where the idea came to be. And on this bike ride, you can imagine I had a lot of time to think, maybe a bit too much time to think. But I was thinking about, look, okay, I actually love what I do. I just need change. And is there a market opportunity out there where I can really kind of lean into it and provide a new tool in the too…

AI assessment note: “It had been 14 years. I had had a great run. I was turning 40.”

Q So when you had that vision of being in between, how did you go about attacking it as a business?

A On the bike ride, it was, if you want to generate liquidity on your private equity portfolio, you really have two options. You can either leverage it up, which in this day and age, you could get 25 to 35% LTV. Maybe before all of this, you could get 35 to 45% Or you could go and sell. And if you go and sell, you're probably selling it in those days, 90 to par. In today's environment, probably more like 85 to 95, give or take. And so the concept was, can we sit in the middle and provide LPs with the opportunity to accelerate liquidity on their private equity portfolios and keep the upside? What we do is that we give 60, 70% of the value of the portfolio. We'll take a hundred percent of the cash flows from that portfolio until we get to, let's call it a minimum return of a multiple, one, three, one, four, or eight to 10%, and then we'll split cash flows. 80% to you and 20% to us. So we're not here to replace debt. We're not here to replace selling. We're here to give another tool in the tool set. But if you lever, you encumber your assets. If you sell, you crystallize a loss, you forego future proceeds, you time the market. With us, what you can do is you can accelerate liquidity on your private equity portfolio, you don't have to time the market, you don't have to crystallize a loss, and you have exposure to the future upside. That we see as a win-win, because actually when we o…

AI assessment note: “What we do is that we give 60, 70% of the value of the portfolio.”

Q So if we tie this back into your founding of Dawson, the other piece that comes up in private equity is just illiquidity, and whether the reason you're getting higher returns is you're getting paid an illiquidity premium. How did you think about that dynamic in the context of what you wanted to do at Dawson?

A Look, I mean, I think from my perspective, so basically, if you ask me, well, what's the problem with private equity? Because I've said, okay, better returns, okay, better governance model. The age-old question of private equity is illiquidity, and that's where the secondary market comes in to help and enable liquidity to an otherwise illiquid asset class. And what it actually does is that it kind of enables the industry and the GPs and the LPs to have what they need. On the left side, you have GPs that need patient capital. They need three to five years to make sure that the company goes through the evolution it needs to actually add the value that it needs. On the right side, you've got LPs that have built their private equity portfolios in different times, in different markets, and has reacted to the markets in different ways. The secondary market sits between the two and essentially provides both the And doesn't disrupt the ecosystem. The GPs get that patient capital. The LPs get to tactically reallocate their portfolios when they need. And when you really think about it, what's the secondary role? Eh, it's starting to sound like a public market. When you start selling a share of Google or Walmart at the end of the day, that's a secondary. And so this is what the secondary market has been doing slowly. It seems like exponential growth. But the secondary market has gone to o…

AI assessment note: “The age-old question of private equity is illiquidity, and that's where the secondary market comes in”

Q So alongside of Providing these solutions for LPs seeking liquidity, there's been a big and growing market of GP stakes and financing. How have you thought about partnering with GPs?

A It's interesting, because in around 2019, we were doing all of these things with LPs, and we're like, well, actually, we could probably do this with GPs as well. Sit somewhere between the debt and the equity and provide structured equities for GPs, for management companies. And essentially sitting Between the debt and the equity in GP stakes, and allowing GPs to be thoughtful about their management company and how they're managing it. What I found interesting is that for the longest time, GPs were private equity partnerships. And they were spending so much time on their underlying companies, and how to add value to the underlying companies. And then just recently, they woke up and they're like, whoa, wait a second, we're an asset management firm. And we should be thoughtful in terms of how we're managing our management company. So what you're going to see over the next decade, we believe, is this trend towards GPs being a lot more thoughtful in terms of how they're managing their management companies. And thinking about new products, thinking about new geographies, thinking about balance sheets, thinking about succession, thinking about all of these things, which is going to, I think, create an opportunity with regards to the GP stakes market. We're here to add another tool in the tool set for GPs as they think about their management company and how they want to manage that to …

AI assessment note: “we could probably do this with GPs as well. Sit somewhere between the debt”

Q What are some of the ways that you've used these modern to AI tools and machine learning tools to improve your process?

A We talk about proactively pricing funds. We're using that AI to scrape data and coming out of PDFs into our models. And that allows us to avoid or at the place of using our resources for manual input, you're using it for actual analysis because the data is already in. It also allows for greater accuracy of data because actually those machine learnings are incredibly powerful. The accuracy that we're seeing out of our system, we're just seeing the benefits of that right now. The white papers that we're putting out as an example, these are all because of the data that's available to us that we can transform into insight, and that's good for the white papers that we put out, but imagine what that can do for our investment process when you've got that much data and you know how to mine it. So data is useless if it's not accurate, and data is useless if you don't mine it. So you have to really build a technology platform that enables you to do both, and we feel really good about where we're at right now.

AI assessment note: “We're using that AI to scrape data and coming out of PDFs into our models.”

Q How have you organized your team to cover what's become an increasingly large industry?

A We got six pillars at Dawson. Strategic management, capital management, asset management, portfolio management, operations management, firm management. New products and partnership, strategic, capital raising, capital, asset deploy, portfolio manage the portfolio, firm management, service our clients, and then operations. And then within the asset management, we have folks that are in sub teams, GP coverage, that merely are the financial sponsors, but also focusing on both primary co-investments, and then also the deal doing folks on the secondary side. I spent a disproportionate amount of my time thinking about organizational structure and making sure that we align the organization to how we do things and making sure We have two offsites a year, one in January, one in June. We set KPIs in January. We keep ourselves accountable in June. And it's so important to bring the firm together, not just for informal bonds and being able to build relationships so that you essentially allow people to get to know each other and that breaks down silos, but also to just really keep the organization focused in terms of what are the strategic initiatives? What are we trying to achieve this year? What are our priorities? The trick is to simplify complexity and have a clear vision so that people walk away from these sessions knowing, uh-huh, the top three to five things that we need to do for th…

AI assessment note: “We got six pillars at Dawson. Strategic management, capital management, asset management”

Q How did you go about finding the opportunities to provide that capital?

A Well, we did 2400 meetings in 24 months when we first started. We just pounded the pavement. We just went out there. We talked about it. Like, going back to passion, patience, and persistence, like, we had a lot of conviction in what we're doing, because we just thought there's a place in the market for this. We just had a lot of conviction, and we started talking to the market. The concept of what we're talking about pivoting and adapting, We had to hear what the market was ready for, and we had to essentially take that, pivot, adapt, and then create structures where the market was ready for it. We probably came out, and we were one step ahead too far of the market, and we just kind of slowly but surely took feedback and got to a point where we're a 175 people. I mean, I'm pinching myself. This is way beyond my wildest expectations. I'm so grateful of everything that we've been able to achieve. And it's just been an incredible ride, and we're just beginning. That's the thing, is I look at it, and I'm like, wow, we've stumbled upon something that is limitless. If you think about a 15 trillion dollar private capital market that's going to grow to 30 trillion by 2030, our opportunity is to inject liquidity into that market.

AI assessment note: “we did 2400 meetings in 24 months when we first started. We just pounded the pavement.”

Q What's your favorite example of that in the Mexican furniture store?

A Oh boy, there's so many. I mean, we're gonna have to go through and have a beer over this one at some point in time. We essentially had Wine racks that was going in the wrong direction, because we literally had no idea what furniture was or how to go about doing it, so we were learning lots, and I did this with a partner of mine, and we were 22 and 24, and lots of big lessons learned, including resilience. I think that's probably the one that I learned the most, is how to just lean into yourself and create conviction around an idea that you had, and that with grit and patience and passion and persistence, Humans can do a lot more than they think they can.

AI assessment note: “We essentially had Wine racks that was going in the wrong direction”

Q How much of that chatter in the seat you were in was internal? And you think about a pension fund, you don't always think of these types of entrepreneurial endeavors.

A Well, it was really interesting, because that period of time, certainly in that era, CPP was building, and it was very thoughtful in the way that it went about allowing them to go into different products, and they were an innovator in that market. I got lucky. In hindsight, everything I've done in my career has always been about intellectual compensation over financial compensation, and I was lucky to be in the right seat at the right time with that organization that was enabling us to go out there and pursue ideas. During a period of time where that firm was growing and scaling really large and trying to find ways and unique ways to deploy capital where they could generate good risk adjusted returns. Now, did I wish at the time when I was going through that, that it would go quicker than it did? Absolutely. I was a young whippersnapper that really was impatient at times. But in hindsight, looking back, it was just this incredible experience. And actually, those moments when they held me back a little bit, and I thought I could do more, it was actually keeping me on the playing field so that I could really recognize patterns and behaviors and really understand the art and the craft of this so that It made me a better person as I grew up. It went from like being a player to player, coach to coach, but you need to be on the field for a while to be able to be a good player, coach …

AI assessment note: “that organization that was enabling us to go out there and pursue ideas”

Q from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. How do you think about scaling alongside of that industry growth?

A I am a big believer in scale. I say scale matters. Big is beautiful. Growth is good. We, over time, have become bigger, better, faster, stronger. We've become more resourced, more informed, more sophisticated. We have been able to invest in our team. We've been able to invest in our technology. In the whole journey of this, what we have been able to do is show up in the market with a product in which we can execute with speed, with scale, and with certainty. All because of scale. It's interesting in the secondary market, because as big as it's gotten, there's actually not that many players that can show up with a billion dollar check to provide liquidity to a counterparty, certainly in speed and scale. So we're sitting there saying that's our opportunity. We say that we are unapologetic about our growth. We think that at the end of the day, growth is an important way that we differentiate ourselves in the market. And as I said, we're just getting started. And growth and scale allows us and positions us to come through for our investors. And that's ultimately what it comes down to, is being able to differentiate yourself in the market and being able to move at that speed and scale. But it's not the only thing. We say scale matters because actually what's really interesting and what I've learned along the way is that a growing firm allows you to attract really interesting talent.…

AI assessment note: “We think that at the end of the day, growth is an important way that we differentiate”