Capital Allocators – EP.378: Nigel Dawn – Secondaries in Private Markets

Date: April 8, 2024
Host: Ted Seides
Guest: Nigel Dawn, Global Head of Private Capital Advisory, Evercore

Overview

This episode explores the evolution, dynamics, and future of the private markets secondaries industry, with deep insights from Nigel Dawn, market pioneer and global head of private capital advisory at Evercore. Ted Seides interviews Nigel on the origins and growth of secondaries (buying and selling existing stakes in private equity funds and other private market investments), the motivations of both limited partners (LPs) and general partners (GPs), pricing and process, critiques, and best practices for buyers and sellers.

Key Discussion Points & Insights

1. Nigel’s Background and Path to Secondaries

• [05:34] Nigel grew up in Sheffield, England. Studied politics and East Asian studies, spent time in China, then entered commercial banking, before moving into consulting and eventually private markets via UBS and Evercore.
• At UBS, was tasked with selling a $2B LP interest portfolio, pioneering one of the earliest large-scale secondary transactions (with HarbourVest), setting the stage for a new market.

“I was given the job of selling them into the market which didn’t really exist.” – Nigel Dawn [06:41]

2. Birth and Early Evolution of the Secondaries Market

• [08:36] Early market mostly involved banks managing exposures acquired through M&A. Key early clients were public pensions and institutional LPs consolidating or seeking liquidity.
• LP-GP Dynamics & Stigma:
  • LPs originally viewed selling as “embarrassing,” akin to asking for a divorce. Required GP consent, often granted at GP’s sole discretion.
  • Over time, especially post-Global Financial Crisis (GFC), selling became more strategic, not just a sign of distress.

“It was considered similar to asking a spouse for divorce. Why would you do this? It’s very embarrassing.” – Nigel Dawn [09:37]

3. Catalysts for Market Growth

• Post-GFC (2008-09):

  • Many LPs (especially endowments, foundations, public pensions) became over-allocated to private equity, struggled with capital calls, needed liquidity.
  • Selling in the secondary market shifted from stigma-laden to strategic portfolio management.

• Market Growth Statistics:

  • Early 2000s: ~$6B market
  • Post-GFC: ~$20B
  • 2023: $115B; peak in 2021 at $130B, expected to surpass this [11:48]

4. Evercore’s Role and Business Model

• [13:38] Evercore’s secondaries advisory team has grown from 10 people in 2013 to about 100 across global hubs, focusing on:

  • Advising LPs on selling fund stakes (traditional secondaries)
  • Advising on GP-led transactions, especially continuation funds

• Leadership Insight:

  • A former asset management founder (Ralph Schlosstein) provided a more “business builder”/long-term client perspective at Evercore, compared to “deal-focused” typical bank leadership.

5. Use Cases for LPs and GPs

• [14:25] LPs execute secondary sales for:

  • Redeploying capital from non-core/old funds to core/new opportunities
  • Enabling allocation and liquidity management, especially when overallocated
  • Strategic portfolio pivots (e.g., from buyout to growth)
  • Generating co-investment opportunities

• GP involvement and Continuation Funds:

  • 10-12 years ago, “continuation funds” arose; initially for “zombie”/underwater GPs unable to generate carry, now a tool for leading GPs to retain and realize value in trophy assets while affording LP liquidity options.

“These are the best GPs with their best assets leveraging the secondary market for a number of reasons ... a fairly major development in the market.” – Nigel Dawn [16:47]

6. Pricing in Secondaries

• [18:09]
  • LP business: Buyout funds commonly trade at 90+ cents on the dollar; venture/growth are name-specific, usually 60-80 cents due to concerns around 2021/22 mark reliability.
  • GP-led: Single asset deals typically transact at or slightly below NAV; discounts are modest.

7. The Role of the Advisor and Market Structure

• [18:57] Advisors match buyers and sellers, optimize pricing across asset classes, ensure fairness and transparency—especially important as GP-led deals involve inherent conflicts of interest.
• Market features increasingly specialized secondary buyers (venture, buyout, credit, infrastructure).

8. Buyer Landscape and New Developments

• [20:16] Dominated by large dedicated secondary funds (Alpinvest, Lexington, KKR SLP, HarbourVest, etc.), but now also GPs themselves setting up secondary vehicles to participate in single-asset continuation funds, hedging and augmenting their access to top companies.

9. Incentives, Conflicts, and Best Practices

• [23:54] Early LP skepticism toward continuation funds (due to conflicts) has abated as guidance improved. The ILPA status quo option now guards LP economics in these deals.

“If that LP wants to continue being invested in the asset, their carried interest is not crystallized at the time ... until the final determination of the company.” – Nigel Dawn [24:12]

• Critiques:
  • Ensuring robust, transparent process and equal access to information for all LPs; enough time for evaluation and option between rolling/selling [29:34]
  • GP motivations should be sound (not a workaround for failed exits or underperforming assets); true alignment and rationale matter [27:45]

10. Market Size, Outlook, and New Asset Classes

• [25:30] Secondary volume still only ~2% of private assets under management.
• Entry of new buyers (notably retail via ‘40 Act funds) and the proliferation of GP-focused secondaries could rapidly scale volumes (potential for $200-250B in GP-led secondaries, $400-500B overall in next 3-5 years) [38:13].
• Growing secondary liquidity in private credit, but equity still dwarfs in scale [26:50].

11. Best Practices for Sellers and Buyers

• For Sellers (LPs):

  • “Poor assets generate poor prices … Put some good assets in a portfolio as well as the ones you want to get rid of.” [35:47]
  • Clarity on acceptable prices, willingness to walk away if necessary, credibility with buyers.

• For Buyers:

  • Strong relationships with advisors, pragmatism, ability to move quickly and reliably close. Realism about price discipline (“good at 86, good at 88”). [37:13]

12. Alternative Liquidity Tools

• [32:00] NAV loans are unpopular when used to create artificial liquidity but accepted when drawn to support/value-add to portfolio companies where equity capital is exhausted.
• Sponsor tender offers facilitate diligence and higher pricing for both sides.

13. Pricing Realities

• [33:42] All pricing is tied to GP NAVs, which are generally conservative. Most GPs exit at a premium (25%+) to last NAV. Market premiums/discounts shift with macro factors and leverage availability.

Notable Quotes & Memorable Moments

• “At that time, it was definitely considered odd.” – Nigel Dawn on the early stigma of LP secondaries [09:37]
• “Continuation funds [are] a fairly major development in the market … The best GPs with their best assets leveraging the secondary market … to keep a hold of their best assets …” – [16:50]
• “The secondary market is around 2% of outstanding AUM, in some ways, it’s hardly a secondary market at all.” – [25:30]
• “These are not turnaround stories. These should be very successful companies that are growing ... How many companies are worth it?” – [28:43]
• “We as humans overestimate the risks in doing something and underestimate the benefits.” [42:50]

Timestamps for Important Segments

| Timestamp | Topic | |---------------|---------------------------------------------------------------------------------------------------------------------| | 05:34 | Nigel Dawn’s path to secondaries and early banking/career background | | 06:41 | First $2B secondary transaction – pioneering the market | | 08:36 | UBS creates private fund advisory for secondary sales – early market dynamics | | 09:37 | Stigma of LPs selling; GP consent and “divorce” analogy | | 10:10 | GFC as turning point; secondary market becomes strategic | | 11:48 | Secondary market growth – from $6B to $115-130B | | 13:38 | Evercore team scale and structure | | 14:25 | LP motivations today – portfolio management, allocation, co-investment | | 15:57 | Early GP-led transactions–continuation funds & their evolution | | 18:09 | Pricing dynamics across LP vs. GP secondaries | | 18:57 | Advisor’s role in price discovery and buyer/seller matching | | 20:16 | Buyer composition, new entrants (GPs forming secondaries vehicles) | | 23:54 | Evolution in LP attitudes to continuation funds; ILPA status quo | | 25:30 | Market size perspective – secondaries as a small share; future growth drivers | | 26:50 | Secondary liquidity in private credit | | 27:45 | Good vs. bad practices in GP-led transactions | | 29:34 | LP critiques – process, information, timing | | 30:34 | Step-by-step of a typical continuation fund process and timeline | | 32:00 | Alternatives to secondaries – NAV loans, GP sponsors tender offers | | 33:42 | Reality of pricing to NAV, use of leverage, market risk aversion | | 35:47 | Advice for LP sellers – put good assets in, be clear on price, manage credibility | | 37:13 | Advice for secondary buyers – relationships, process, pricing discipline | | 38:13 | Market projections – dramatic potential growth, retail funds/40 Act | | 39:22 | Democratization/retail flows, growing share of ‘40 Act’ funds | | 40:08 | Evercore’s “information business” advantage | | 40:57-42:50 | Personal closing questions: hobbies, unknown facts, pet peeves, influences, advice, life lessons |

Final Reflection

Nigel Dawn describes how secondaries have gone from a stigmatized, opaque backwater to a vibrant, essential, ever-expanding mechanism for liquidity, portfolio management, and value maximization in private markets. The discussion covers deal mechanics, practical advice for both sellers and buyers, and forecasts a rapid scaling and democratization of the market ahead.

“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.” – Nigel Dawn [42:50]

For more: capitalallocators.com | Episode 378