← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Nigel Dawn - Secondaries in Private Markets (EP.378)
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- [00:01]
Ted Seides
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- [01:42]
Ted Seides
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Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital.
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You can join our mailing list and access premium content@capital allocators.com all opinions expressed.
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Podcast Disclaimer
By TED and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
- [03:33]
Ted Seides
My guest on today's show is Nigel dawn, the global head of private capital advisory at Evercore, where he leads the secondaries business he started a decade ago. Under Nigel's leadership, Evercore has become the market leader in transaction volume and is involved in approximately 30 to 40% of all secondaries market activity. Our conversation covers Nigel's observations on the growing secondaries market, including its history, rationale for LPs and GPS incentives, critiques, other liquidity options, and advice for both sellers.
- [04:09]
And buyers of GP interests Before we.
- [04:12]
Get going, it's springtime in New York, and that means it's time for Yankee baseball. Like each of the last 53 years, I've started dreaming about a perfect season with the Yankees finishing162.0. Now, that's never come remotely close in the history of Major League Baseball, and it never will. But after watching the Yankees sweep the Astros on the road the first four games of the season, thanks to the fielding and hitting exploits of star signee Juan Soto, I'll quote the great comedian Jim Carrey in the movie Dumb and Dumber. So you're saying there's a chance? It's highly likely by the time you're listening to this that the perfect season will have ended. But in this moment, I'm still dreaming. So as the weather turns and you find yourself outside enjoying the sunshine, but a little sad that your baseball team, hopefully the Yankees, won't be perfect again this year. At least you can turn to that podcast app on your phone and listen to Capital Allocators for about as perfect an hour as you can get each week. Thanks so much for spreading the word. Please enjoy my conversation with Nigel Dawn.
- [05:25]
Nigel, great to see you.
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Nigel Dawn
Great to be here. Appreciate the invitation today.
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Ted Seides
Why don't you take me back to your upbringing and path to being in the sea?
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Nigel Dawn
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 became a management consultant and then eventually wound myself around through UBS and then evercore to this seat.
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Ted Seides
Your time at ubs, how did you find your way into these nascent secondary market?
- [06:42]
Nigel Dawn
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 FXall US government bonds became tradeweb. Off the back of that experience I was asked to sell a portfolio of LP interests. It was about a $2 billion portfolio which had come together through M and A activity. UBS merged with Swiss bank and bought Paine Webber and Dylan Reid. Everyone had a few funds. When you put them all together it was 2 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 HarbourVest Partners led by a young associate called Jeff Key who is now one of the leaders of that business. Is amazing in this business what they've achieved. We put together a transaction which probably looks a little bit like one of today's securitizations and during the course of the transaction we explained it to the CFO at HarbourVest who said it was not possible. What we were contempl as she swept out of the room. We did it anyway. We closed the transaction and that's the history.
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Ted Seides
How did the secondary market develop from that initial significant Harbour Vest transaction?
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Nigel Dawn
It's interesting. So on the back of that I was asked by Richard allsop who ran UBS's private funds group the fundraising to come and consider starting an advisory business to advise LPs who were interested in getting liquidity, which is very, very new at the time. The Tresta transaction got a lot of press, so there's a lot of interest. So why not go and do that for other people also maybe 40 to 50% of the flow in the market is actually banks selling. Similar to ubs. We also found out institutional limited partners who felt like for a variety of reasons they need to remove non core exposure. One of the early ones, very notable, very public Ohio Bureau of Workers Compensation. We worked with various public pensions financial institutions and this business started to develop. And I think LPs realized the stigma that was associated with selling LP.
- [09:28]
Ted Seides
Interest was gradually receding in those early transactions. You mentioned that stigma. What was that dynamic between LPs and GPs?
- [09:38]
Nigel Dawn
Most LPs were very concerned about asking the GP for the right to sell. Because every transaction you require the consent of the gp and often then less so. Now that was in the GP's sole discretion. In some ways it was considered similar to asking a spouse for divorce. Why would you do this? It's very embarrassing. At that time it was definitely considered odd.
- [10:03]
Ted Seides
How did it evolve from that? In that period of time as you built this advisory business at UBS, there's a few catalysts.
- [10:10]
Nigel Dawn
Definitely world financial crisis was one. Because then a lot of LPs had to sell. Probably remember you went from the years 2004, 5, 6, 7, where LPs made somewhat unprecedented commits in private equity. And then the economy fell off a cliff and there was a challenge funding a lot of that, 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, 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 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. Sophistication at the time.
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Ted Seides
If you look at that post GFC transaction volume, just rough sense. What did numbers look like that for the industry back then?
- [11:48]
Nigel Dawn
When I started off it was about a $6 billion market. Back then it was probably around a 20. Still pretty small if you roll the clock forward to today. Last year was about 115 billion 2021, which is a high watermark up to this point is about 130 and I suspect we will beat that number this year.
- [12:10]
Ted Seides
So as this business is starting to get traction in the community post crisis, you have a little change in your career. So what was the dynamic that led you to join Evercore?
- [12:23]
Nigel Dawn
I had a great run at UBS. I loved it. I'd been there 16 years. I felt like I was given a great opportunity to set this business up and grow the business. I was looking for a new opportunity, perhaps a little more entrepreneurial. So I met Ralph Schlosstein who was the CEO of Evercore at the time and he convinced me that Evercore would be a good platform to grow a business like this. Also I think that these are pure advisory businesses that require no capital and they're challenging to run in big integrated banks that do require a lot of capital. So I thought this was a natural platform. And also Ralph was one of the co founders of BlackRock. I thought it was very interesting to work for someone who really understood the asset management business and was willing to lean in to help us grow this business.
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Ted Seides
What are the subtle differences you've seen between a leader who came from asset management compared to a leader that's running a bank?
- [13:18]
Nigel Dawn
Well, I thought in the case of Ralph, it was a business builder, somebody who's built a business rather than somebody who's just focused on doing deals. It's a founder's mindset. Evercore has a more long term perspective on clients and how we work and realize it's not all about doing the deal this year.
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Ted Seides
What's the scale, scope of your team today?
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Nigel Dawn
We started with 10 people in 2013 and 10 who miraculously all appeared on the same day happened to be at UBS. Coincidentally we're about 100 people right now and spread between Chicago, New York, London and Singapore. We really focused on two main things which are advising limited partners on the type of business that most secondary groups still direct most of their capital to and a very active GP driven business which is mostly but not exclusively continuation funds.
- [14:11]
Ted Seides
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?
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Nigel Dawn
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 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. And maybe they 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 adhering to.
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Ted Seides
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?
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Nigel Dawn
When I think 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 or 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 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 the same time providing an option but not a requirement for their LPs to take liquidity. So that is a fairly major development in the market that can be one company or in this environment where distributions have almost been at historic lows compared to assets under management. Execute a transaction really designed to generate DPI for their investors across a number of their companies and these could be 3, 4, 5 more companies where we'd put them together, sell them into a new vehicle, provide an option for their investors to receive liquidity from the buying group, often dedicated secondary groups to roll over into the transaction on their existing terms.
- [18:06]
Ted Seides
What does pricing look like across these different types of transactions?
- [18:09]
Nigel Dawn
Start with the LP business. So in this market, which is good, good quality buyouts, probably in the 90s, venture and growth very much name specific. So some managers still very difficult to access. So you pay an access premium, but probably more like 60 to 80 cents on the dollar because there's a little bit of skepticism still about the manager's marks from 21 deals, beginning of 22 deals. So that's roughly where pricing is generally on the GP side that on a single company it usually transacts around the GP's nav, typically not at a discount, but if it is, it's at a modest discount.
- [18:49]
Ted Seides
As you look at the market today, which is north of $100 billion annually and growing, how do you bring these buyers and sellers together?
- [18:57]
Nigel Dawn
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.
- [20:07]
Ted Seides
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, mostly it's still.
- [20:17]
Nigel Dawn
Large dedicated secondary groups, alpinvest, Lexington, Karla 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 the 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 those companies. And that might, even if it's via a continuation fund, as long as the returns make sense and as long as I'm an acceptable investor for the GP who's issuing the continuation fund, I'm curious.
- [22:01]
Ted Seides
To pull the thread on incentives in all this. So in this example you can envision a GP not wanting certain GPs to participate in their deals and have transparency of their process. What have you seen in that GP dynamic for the sponsors who are setting up secondary funds?
- [22:23]
Nigel Dawn
I would just preface it saying one, it's very new, so this is evolving. The second thing is the capital base for single asset continuation funds is very, very small right now. And there was about $20 billion of single asset continuation funds done last year out of $50 billion of GP driven transactions executed. Our sense is a they would value the capital right now having the capital is valued, but often it will be a GP investing in a company where the GP is smaller than they are. So they would generally looking to buy from smaller GPs and then they work on the companies and then they sell those companies on later. So what we found, often they will bring some capabilities that maybe a smaller GP doesn't have. Even though they are a passive investor in a continuation fund, there's some value added they can bring that maybe increase the value of the company in a continuation fund. But also clearly it will position the GP who has set up a continuation fund to be the buyer of choice at the time those assets are then sold.
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Ted Seides
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?
- [23:54]
Nigel Dawn
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. 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 Ilper, about a year ago issued updated guidance on continuation funds. And the key change in their 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'm 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.
- [25:17]
Ted Seides
The size of this market, you're talking about $100 billion. 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?
- [25:31]
Nigel Dawn
The secondary market is around 2% 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 you've seen a couple close this year on 22 billion. There's others talking even north of that. Plus I think when the new entrants I've just identified the types of group start their secondary funds, just focus 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.
- [26:37]
Ted Seides
So alongside this large private equity market with a smaller secondary market, you've got this burgeoning private credit market, also illiquid assets. What have you seen in terms of secondary liquidity to private credit?
- [26:51]
Nigel Dawn
It's a good question. So it's probably one of the areas of the market that's getting the most attention right now. A significant amount of capital is being raised in the secondary credit market to buy portfolios. It's still early days and it is an asset class that naturally unwinds. So will it be as big as a private equity market? I doubt it. But at the same time, in the current market, private credit is probably trading in the 90s. So for an LP looking to generate liquidity across their private assets, portfolio is a good place to look. So we are positive on the growth of the market, but it's still relatively small compared to private equity.
- [27:32]
Ted Seides
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 For.
- [27:46]
Nigel Dawn
A GP Drum transaction, the rationale has 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 as gp. The transactions that are less favorable to the market is where there's been a fail 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's 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 you think I can do? The answer from me usually is, well, how many companies are worth it? As the market's developed, obviously you get certain practices that are less favorable. Ultimate though, these are alignment transactions. Is a new buyer aligned with the gp? So if it's a situation where GP wants to take most of their carry off the table, people sniff that out pretty quickly. You've got to be in, you've got to be aligned. The price and the terms have got to be right. A lot needs to go right in these transactions to make them successful.
- [29:29]
Ted Seides
What are some of the critiques, concerns you see from the LP side?
- [29:34]
Nigel Dawn
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.
- [30:16]
Ted Seides
LPs doesn't end well when something is down the middle. So say it's a private equity firm with a good asset performing well, end of fund life, they want to do continuation fund. Curious what the process looks like and how long it takes from when someone's reached out to you, say, hey, we're thinking about this to closing the continuation fund.
- [30:35]
Nigel Dawn
It's usually four to five months. We usually take four weeks or so just to prepare the transaction. And the key thing there is the projections for the company going forward. Because really what you're saying is if you had another five years, what would it look like and if you had some more capital, what would you do with it and what would the projections look like then the diligent period then starts with what we think are the lead investors. So we would invite five to 10 groups and typically to spend time with the GP first on the business case. And at that point in time they would access to a data room, perhaps some access to the CEO, but somewhat limited. These are very light in terms of the underlying management team. Then there's usually a second round where we have pricing and terms, discovery, there's legal documentation and finally there's four weeks where the LPs get to decide whether they want to sell, whether they want to roll. They spend time with the manager, usually usually the presentation from the manager with the same one they give to the secondary buyers. And then there's an election period where the LPs of the GP decided they're going to sell or reinvest.
- [31:44]
Ted Seides
As secondaries get increasing importance in this period of time where people are looking at liquidity, there have been other things, other innovations, NAV loans and others about ways of generating liquidity for LPs and would love to get your take on. Let's start with just the NAV loan market.
- [32:01]
Nigel Dawn
NAV loans have been around for a long time. I think they've become much more popular recently given the lack of distribution activity within private equity funds. NAV loans that are raised against a portfolio to send capital back to LPs very unpopular, very high priced. Many LPs don't like them. They can raise capital cheaper themselves, so those are not popular. NAV loans raised to support portfolio companies are often much more acceptable to LPs particularly in a situation where the fund has no more unfunded capital but the GP needs to grow their portfolio or when they need to defend their portfolio. Those situations are much more preferred also, particularly in a time where that might be a cheaper form of capital to grow companies rather than drawing equity capital down from LPs. So if they're given those choices, that's a good way to use a NAP loan. Other things we're seeing recently is GP sponsors tender offers where the GP will help facilitate the diligence process with secondary buyers to provide an offer to the GP's investors in their previous vintage funds. The new investors typically make a commitment to the new vintage funds. The GP is deeply involved in the diligence on the existing portfolio which typically generates a better price for the LPs. Those transactions tend to be a win.
- [33:22]
Ted Seides
Win across the board price these days or what price is what. NAV is a subject of a lot of debate. Would love to see from your perspective of looking at these secondary transactions across private equity venture infrastructure. What have you seen in terms of the reality of pricing of these assets?
- [33:43]
Nigel Dawn
GP's NAV is the anchor. So all pricing is based on discount or premium to nav. And usually those are somewhat conservative numbers in terms of most GPs exit their portfolios around 25% premium to their NAV. In very hot markets, usually they tend to trade at a premium and part of the reason they trade at a premium is because the buyers can use more leverage in their transactions, which is usually in better times is cheaper leverage in this market right now a price in the 90s is more a price where equity capital is being used by the secondary buyer. So there's less leverage, there's more equity, there's arguably less upside in the GP's portfolio at a time like this. Given we've just gone through, assets that were put on the books in 21 are arguably overvalued by historical standards.
- [34:37]
Ted Seides
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.
- [34:45]
Nigel Dawn
I've referenced some of them where for example a GP is a surprise when a transaction comes to an office. 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.
- [35:35]
Ted Seides
If you look at your advising LPs, I'd love to ask if someone was trying to generate liquidity, what would you advise them as best practices to maximize the price they can get for assets?
- [35:47]
Nigel Dawn
It's a great question. When we work with them, we always give a very, very good sense where the pricing is likely to come out. And if LP doesn't like the pricing, it's not acceptable vesting just don't move forward at that time. I think you got to realize that poor assets generate poor prices so often that you will get premium pricing for your best assets because the buyers can sleep well at night and are willing to accept In a sense, lower returns of very high quality assets. You've got to be willing to put some good assets in a portfolio as well as the ones you want to get rid of. Because you have to remember on the other side, the secondary investor is going to go to their ic, they're going to present the transaction. You need some shiny bits in there as well, things they're going to get excited about. And so getting excited about certain assets can cover up a lot of sins. That's one thing I would say. Also having a real good sense where you're willing to transact and being very clear with the advisors at what point a transaction's possible. So I think that clarity, because I think it's difficult to come in and out of the market and not sell without losing some credibility with the buy side.
- [36:59]
Ted Seides
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?
- [37:13]
Nigel Dawn
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.
- [38:10]
Ted Seides
Where do you see this market going over the next couple years?
- [38:14]
Nigel Dawn
I think that it is poised for significant growth and that comes from the new entrants that are coming. I wouldn't be surprised. In the next couple of years, there's 10 to 20 new secondary funds focused on the GP side. So they're going to focus on the side where there's the least capital and they're going to bring a lot of capital. So it would not surprise me if the GP side of this market is 200 to 250 billion dollars in five years time. So if you add that onto what we think is A natural growth Also in the LP market getting to 4 to 500 billion is reasonable. I think the other thing that really fires that is the growth of retail in private equity and particularly the 40 ACT type of funds which have a natural desire to buy secondaries because they raise capital every month, they need to put it to work. If you put it into secondaries then you can get into ground very quickly. So what we're finding right now, they're becoming increasingly important as a buyer in our market whereas two or three years ago they would have been zero.
- [39:14]
Ted Seides
I keep hearing about this democratization of alternatives. There's this money that's coming. What have you actually seen in terms of that piece of the fund flow?
- [39:22]
Nigel Dawn
What we're finding is maybe 10% of our buyers right now may be slightly more. But what we are seeing is that when both GP and LP side, when buyers are presenting their offers, often one of the buying vehicles will be their 40 ACT fund and those funds generally they compounding 11, 12, 13% they're getting bigger every single year because I think generally the withdrawals are very low. So there's the snowball going down a hill here. So I think they will be major league buyers in a few years time.
- [39:56]
Ted Seides
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.
- [40:08]
Nigel Dawn
Today, 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 if we are 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 a 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.
- [40:50]
Ted Seides
Well, Nigel, I want to make sure I get a chance to ask you a couple of fun closing questions. What is your favorite hobby or activity outside of work and family?
- [40:57]
Nigel Dawn
I'm a big supporter of Sheffield United States who are a disaster this year in the Premier League. I got my first season ticket when I was 12 and when I go back I sit in the same seats with my high school Buddies. So that's a passion of mine.
- [41:09]
Ted Seides
What's one fact that most people don't know about you?
- [41:13]
Nigel Dawn
Probably I've lived in China and speak some Chinese. The other one, maybe I think I've seen you two 30 times back in the day, but not recently in the sphere, unfortunately.
- [41:23]
Ted Seides
What's your biggest pet peeve?
- [41:25]
Nigel Dawn
This is going to sound incredibly petty, but probably after the pandemic, if you go to Starbucks and you get a coffee, you can no longer put the half and half in yourself. And so I always get too much in or it's too little and I'm like, we passed Covid. Put the milk back on the side.
- [41:44]
Ted Seides
How about on the investment side? Your biggest investment pet peeve?
- [41:47]
Nigel Dawn
I just think not getting the transparency of information, I would say that would be probably my pet peeve.
- [41:52]
Ted Seides
Which two people have had the biggest impact on your professional life?
- [41:56]
Nigel Dawn
Richard Allsop. Because I think his vision, there's few people who see round corners. He's one of them in this business and giving me the opportunity to think, why don't we set up a liquidity advisory business in the early 2000s. No one else was really doing it. So giving me that opportunity and then moving to Evercore, meeting Ralph at the time and then him seeing this business willing to back us and be a big supporter of the business, both of them have been amazing.
- [42:25]
Ted Seides
What's the best advice you've ever received?
- [42:28]
Nigel Dawn
Focus on communication skills, Become a good speaker, learn how to present, learn from the best. Because technical skills only get you so far. Being able to communicate and get your ideas out so other people can understand them, I think was really good advice because I was pretty crappy at it.
- [42:45]
Ted Seides
All right, Nigel, last one. What life lesson have you learned that you wish you knew a lot earlier in life?
- [42:51]
Nigel Dawn
Take more risk. I think we as humans overestimate the risks in doing something and underestimate the benefits. And so being willing to jump at an opportunity and expect to succeed, if you don't, then at least you tried.
- [43:06]
Ted Seides
Nigel, thanks so much for sharing your wisdom about this burgeoning secondaries market.
- [43:11]
Nigel Dawn
I appreciate it. Thanks for the invitation.
- [43:14]
Ted Seides
Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com or where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast, transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.