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Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
AGM Unscripted: Goldman Sachs' Harold Hope - Secondaries: A Primary Consideration
00:18:54
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- [00:00]
A
I think it's really about problem solving. I think every time there's been an innovation it's been because there's been some problem and people don't know how to fix it. And if it involves illiquid assets, the secondary market has said, well, you know what, actually we can figure out a way to do this. We can figure out a new structure or a new security or some other way to kind of solve that problem for you. And so what I love about this industry, it is a solutions oriented industry. Foreign.
- [00:37]
B
Welcome back to the Altco's Mainstream podcast. In this special series, we went behind the scenes at the Goldman Sachs Alternatives conference and interviewed six Goldman Sachs Alternatives leaders about their current thinking on private markets and how the firm has built and evolved its private markets capabilities. The next interview in this series is with Harold Hope. Harold is the global head of Vintage Strategies, one of the world's largest secondary fund managers in the external investment group XIG within Goldman Sachs Asset Management. We had an interesting and insightful conversation. Thanks Harold and please enjoy. We're going mainstream. Harold, welcome to the Altgoes Mainstream podcast.
- [01:15]
A
Thanks for having me.
- [01:16]
B
I think such a fascinating time to talk about the work that you're doing. Secondaries is top of mind for so many reasons. Maybe we should just say secondaries are in first right now. I like that. So first I want to start with your background and how you got here because I think that'll be instructive to the conversation about where the secondaries market is today.
- [01:37]
A
Well, like a lot of people that have been in the industry for a while, I sort of fell into it. I was working at Goldman Sachs, I was in investment banking. This is 25, 26 years ago. And I realized that I wanted to do something that was more investment oriented, more long term. And we had actually just raised our first secondaries fund, which was $400 million. The market back then was maybe like $2 billion a year in volume. And I happen to know a couple folks that were in that group and I convinced them to let me join them when I was kind of a junior professional. And that's what I've been doing for the last 25 years.
- [02:13]
B
How has the market changed and has it changed in ways that you've anticipated?
- [02:20]
A
It has changed so much. I look at the market today, it is so different certainly than it was 25 years ago, but even just five or 10 years ago. And I think the biggest drivers of change have been just the growth and the size and scale. A lot of that's been driven not so much by secondaries, but more by the growth in private markets and the wider range of investors in the asset class, the need for more liquidity. So that's been the biggest driver. And then the other big driver I think has been innovation. The secondary market has done a really good job of viewing itself as a liquidity provider and sort of being very open minded and flexible about what that means. So when I started secondaries was just buying limited partnership interest in funds and then over time it became spinning captive teams out of banks that had gone through mergers or buying hedge fund side pocketed assets that had been side pocketed by the managers or doing structured secondaries, preferred equity type of investments. And more recently I think continuation vehicles have been a really innovative structure.
- [03:22]
B
Where my mind goes when you talk about all this innovation is where's the innovation emanating from? Is it GPS looking to find solutions or is it the secondaries firms dreaming up these interesting ideas and concepts? And obviously it has to marry with the evolution of the space, the advent of technology and the market infrastructure change as well. But how is a lot of this innovation unfolding?
- [03:49]
A
I think it's really about problem solving. I think every time there's been an innovation it's been because there's been some problem and people don't know how to fix it. And if it involves illiquid assets, the secondary market has said, well, you know what, actually we can figure out a way to do this, we can figure out a new structure or a new security or some other way to solve that problem for you. And so what I love about this industry, it is a solutions oriented industry.
- [04:15]
B
Well, on that point I think that's a great segue because I asked that last question in part because I wanted to kind of unpack how the industry works to understand what the right skill set is. In some senses it combines this element of you need to understand private markets and the various nuances of it. But there's also some elements of needing to understand public markets and how to think about things in a slightly different way than just being a pure play private equity investor or infrastructure investor.
- [04:44]
A
As an example.
- [04:45]
B
What do you think are the skill sets required in today's secondaries business?
- [04:51]
A
Fundamentally this is a valuation oriented business. We are buying illiquid assets. There's not a ready mark on them. You've got to go figure out what the right price is to pay for those assets. So fundamentally most of our team's time is spent valuing private companies. But that's not enough to execute in this Business, you've got to take that valuation, then you've got to figure out how to problem solve, how to negotiate, how to be flexible, how to come up with new structures, how to identify great investment opportunities. And so I think all of that is really around the margin. And you're doing it in an environment where you're not an active manager of companies, you're not driving company direction, you're a liquidity provider. And so it's important that you have relationships not only with the owner of assets, but with the manager of the asset as well. And oftentimes these are transactions that require everyone to get on the same page to make something happen.
- [05:43]
B
You bring up an important point and I want to tie that to a word that you use, which is valuation. When you think about secondaries, there's different ways to approach investing. In secondaries. You can be a discount oriented investor or you can try to find great assets. I'm sure there's a cross section or intersection of those two as well. Different firms employ different strategies. How do you think about the secondaries market? And is there one way that's better than another?
- [06:11]
A
You can't do both. You can't buy great assets at a discount.
- [06:15]
B
Maybe you can. And that I think gets to the solutions provider side of things as well.
- [06:19]
A
The market is rational. If you have a portfolio of assets that is lower quality or that their future is more uncertain, it's natural to assume that that's going to require a bigger discount to get liquid on that. And if you have higher quality assets, those should trade at smaller discounts. I think that at least from our perspective, we think a portfolio should have both. I think there's opportunities like we're a big buyer of older portfolios, tail end portfolios, where we don't expect the companies to grow much after we buy them, but we can be a liquidity provider for people who need to wrap those investments up. And we think we can buy those at really attractive discounts that justify purchasing them. We also like to buy high quality companies. We'll pay smaller discounts for them or we'll do them in continuation vehicle format where maybe there's no discount involved. And so I think that from our perspective, I think you have to do both. I don't think you should just do one or the other.
- [07:15]
B
I want to touch on CVs as well because I think there's some misconceptions about CVs. I think looking from the outside in, some people look at the CV market and say, well, a firm wants liquidity but still wants to hold onto the asset. Some people would say, well, why? There's also data out there that shows that particularly in single asset CVs, those can actually outperform at times relative to either multi asset CVs or funds, private equity funds. How do you think about the CV market and what are some misconceptions about how those not as close to the space might think about it?
- [07:56]
A
It's a part of the market where we spend a lot of time. I've got personally high conviction in the opportunity set, but you're right, I think there are a lot of misconceptions. I think there's this view out there, well, aren't these companies that can't be sold another way isn't this the manager doesn't know what to do and so they're just doing a cv. And while any market that's grown as quickly as that market has has examples of deals being done for the wrong reasons or situations that aren't probably appropriate, I think what we're really trying to do with continuation vehicles is solve a problem that is frustrating a lot of managers, which is they raise a private equity fund, they make a bunch of investments, they go to raise their next fund. The first question they're getting asked in today's market is what have you realized? Where's the dpi? Show me examples of exits. And the problem they have is that oftentimes the company that's natural for them to exit is their best performer. And oftentimes they feel like it's too early to sell that business. They see a lot of future growth potential, but they feel forced into selling it by the nature of their fundraising cycle. And it's even more frustrating if they sell it to one of their competitive private equity funds who then goes and runs their playbook and doubles or triples their money. So I think that one of the use cases for continuation vehicles is really offering a manager another alternative, which is to say, look, here's a way to give your investors liquidity to prove that you can generate some dpi, but also allowing you to continue to manage that asset and continue to participate in the value creation.
- [09:28]
B
On that point, how much does the trend of private companies staying private longer and not necessarily needing to go to public markets is liquidity then? Because the next question with CVS becomes, well, once there's a cv, who's the next buyer or what's the next exit for that cv? So how does this trend of private companies staying private longer impact the whole CV market?
- [09:52]
A
We're Believers that ultimately there needs to be some kind of exit. You can do a continuation vehicle. And now we're starting to see a few continuation vehicles on continuation vehicles. And I get that. But at some point there needs to be some exit. But there's no doubt in my mind that the secondary market has facilitated companies staying private for longer, especially companies where there's continued value creation. Private equity has a lot of different models. Sometimes the model is we're going to buy something, we're going to come in, we're going to fix it or grow it three or four years and then our job is done. It's time to exit. In other cases, and we've seen this in especially some of the buy and build scenarios, you go, you make a bunch of acquisitions, you build scale. Well, actually there's a lot more acquisitions to do. There's more scale to be had. I think the opportunity to keep holding the asset and generate that next leg of growth. Yeah, some companies should stay private for longer.
- [10:44]
B
Companies staying private for longer. That's a great segue to the world of venture.
- [10:47]
A
Yeah.
- [10:48]
B
You recently made a big acquisition in the venture and growth space. You bought industry ventures. Why did you decide to add industry to your platform?
- [10:59]
A
We're super excited about it. Industry Ventures is a team that we've known. I've known them personally for 20 years. They are market leaders in venture and growth and venture and growth secondaries. And it was a pretty unique set of circumstances that created that opportunity. From our perspective, what made it interesting is one, we just think the opportunity set in venture and growth secondaries is growing pretty dramatically. That's a market where you mentioned companies staying pretty private for longer. There's been a lot of capital formation. The number of venture firms has grown substantially. So it's just a market that we've seen grow a lot. And I think the other thing that made it interesting is we are believers that if you want to be successful in secondaries in the future, you need to have some specialization. You need to match what's happened in the private markets over the last 20 years. Which means you need to have dedicated teams and capital in areas like private equity, real estate, infrastructure, credit, venture and growth. And we have all those pieces except for venture and growth. And so industry ventures is a way for us to kind of complete that multi strategy build out.
- [12:01]
B
I want to touch on that last point you just made, which is having specialized teams in different categories of secondaries. You're seeing areas of secondaries. Private credit secondaries is starting to grow. Large firms have raised Funds in that space, but it's still a very nation growing space infrastructure, secondaries as well. Why do you feel that it's so important to have specialized teams in each category? And then where do they all benefit from the harmonization across Goldman's broader platform?
- [12:33]
A
Well, remember, we're working with a lot of managers of funds and I think the truth is that managers of funds want to work with secondary buyers who speak their same language. If you're a real estate manager and you're talking to a secondary buyer who wants to talk about EBITDA multiples, that's a foreign concept for you. You want to talk about cap rates or NOI growth. So I think part of it is meeting the managers where they are with their level of expertise and their understanding and part of it is having the capital that matches the return expectations and the duration of these different asset classes. Return expectations and credit are very different than venture and growth. And if you have one pool of capital trying to do all of that, that's a pretty challenging equation today.
- [13:14]
B
What do you think makes Goldman different when it comes to secondaries? You have so many different aspects of the business and the platform. Not just within asset and wealth management, but within the broader firm banking business. Within xig, you have all sorts of strategies, whether it's private equity, private credit, GP stakes, infrastructure, real estate. There's so many different touch points to the private capital world. How does that give you purview into the market and an advantage as you run the secondaries business?
- [13:47]
A
I feel so fortunate to do this business from the Goldman Sachs platform. We are a big believer that in secondaries scale matters. The ability to be large, to solve problems for people at scale, the ability to invest in your business in only the way a large business can. Whether that's having over 100 people on your investment team or having 14 engineers, or having a huge database that goes back 30 years and mining that with data and AI. Those are only things you can do when you're at scale. So I think that does make us a better solutions provider and having access to all the insights around Goldman, the sourcing networks, the industry insights, the relationships with managers. I think it's a pretty powerful platform.
- [14:29]
B
I want to touch on something you mentioned. Data and AI. How important is the ability to leverage technology to analyze data within private markets as it relates to secondaries?
- [14:43]
A
I would stipulate it's more important in secondaries than in any other part of private markets because we're the part of the private markets that buy portfolios in scale. It's not uncommon for us to buy someone's 50 fund portfolio that has 400 companies in it. And how do you go about valuing 400 companies? How do you figure out what the right price to pay right now or in the past that's been done pretty manually.
- [15:10]
B
How efficient is that market going to become?
- [15:13]
A
I don't know. I mean it's still a market. A lot of people like to say, well, secondary is going to become like the bank loan market, which started as a sort of inefficient market and then became ultimately a trade in market. I think we're a long way away from that. I think fundamentally there's not really interest among the managers and having stakes in their funds traded, there's not interest in standardizing their documents with everyone else's documents. So while I think for certain funds that are well known, I think it's relatively easy for you to get a price and understand where the market value is. It's still a cumbersome process to sell it and I don't really see that changing anytime soon.
- [15:48]
B
The other part about that too is when you think about some of the recent trends in the secondaries market on the LP side, there are situations where whether it was denominator effect or with some of the endowments more recently, they had to trade not because they wanted to necessarily, but because of portfolio level solutions that I think makes this a market that's a little more bespoke. And I guess does that mean that it's going to continue to be bespoke?
- [16:15]
A
Well, I think we're in a moment in time right now driven by the lack of distributions and private equity and that is creating an unusually large demand for liquidity. And so at some point that will abate. Now the other trend going on is continued growth in private markets, which is going to keep an innovation which is going to keep driving volumes up. But clearly we're in sort of this unique moment where the demand for liquidity is really high.
- [16:42]
B
How big can the secondaries market become?
- [16:46]
A
A lot bigger. Right. I think I look, I think this year we're going to end up with probably over $200 billion in volume. Could it go 200 to 300 to 400 to 500? It easily could because the denominator of private assets has tripled over the last 10 years. And so the pool of illiquid assets is much larger. And we're effectively a liquidity provider on that pool.
- [17:08]
B
You're in the early innings within secondaries. I think it's actually interesting to Think about that in the context of the Wealth Channel, which obviously that was a big part of today, the Goldman Alternative Summit. The Wealth Channel is an increasingly active player in private markets, but still many are either underinvested or uninvested in private markets. Is secondary's a great on ramp for many investors who are not yet exposed to private markets? And if so, why?
- [17:37]
A
Well, I think secondaries does have a lot of appeal for folks in the retail channel because it is a strategy that provides a lot of instant diversification and I think has good sort of risk return trade off. The other thing that's interesting about it is it's proven to be a strategy that can deploy capital when times are good and people are actively managing their portfolios as well as in times of dislocation, when people really need liquidity. So I think those are the factors that really attract people to secondaries. When you look at some of the new retail capital formation that's happening, well.
- [18:10]
B
You have to go to an LP meeting, you get to that and talk with LPs about secondaries. This was a fascinating conversation. I think you tied so many different aspects of the secondaries market, the opportunity set. You've been doing this for a long time, but yet it still feels so early, which is exciting. And then you add different pieces of the platform, industry, ventures, et cetera. It's exciting to see what you've built and I'm excited to see what you'll continue to build.
- [18:33]
A
Great. Well, thanks so much for having me.
- [18:35]
B
Thanks so much, Harold.
- [18:36]
A
Appreciate it.
- [18:36]
B
Yep. Yeah.
- [18:36]
A
Thank you.
- [18:37]
B
Thanks for listening to this episode of Alt Goes Mainstream. I hope you enjoyed it. You can read more about Alts at my substack, altgoesmainstream. Substack. Com. Thanks a lot and have a great day. We're going mainstream.