E216: How the $100 Billion Continuation Vehicle Trend Is Changing Private Equity

Summary

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How I Invest with David Weisburd

Episode 216: How the $100 Billion Continuation Vehicle Trend Is Changing Private Equity
Guest: Paul Cohen, Managing Partner at Agility Equity Partners
Date: September 22, 2025

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Overview

In this episode, host David Weisburd interviews Paul Cohen, Managing Partner at Agility Equity Partners, about the explosive growth, mechanics, and implications of continuation vehicles (CVs) in private equity. They delve into the evolving trends, due diligence nuances, alignment of incentives, risk-return characteristics, lower-middle market opportunities, and the rise of independent sponsor deals. The episode provides both a quantitative and qualitative assessment of the CV ecosystem, drawing on recent research and decades of direct investing experience.

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Key Discussion Points & Insights

1. The Rise and Scale of the Continuation Vehicle Market

• Market Growth:

  • In 2024, the CV market reached $70 billion, up from $7 billion ten years prior.

    “The size of the market in 2024 was $70 billion. And to put that in perspective, the size 10 years ago was $7 billion. So it’s just been growing dramatically.”
    — Paul Cohen [01:13]

  • The first half of 2025 saw another 30% increase, putting the market on pace for $100 billion by year's end.

    “It grew 30% first half of 25 versus 24... on pace to hit $100 billion versus 70 last year.”
    — Paul Cohen [01:34]

• Capital Dynamics:

  • In buyouts, dry powder to deals done is about 4:1, but in secondaries (and effectively CVs), it’s close to 1:1, signifying a capital-constrained and opportunity-rich market.
    — [01:34]

2. Explaining Continuation Vehicles: The Mechanics

• What is a CV?

  • A continuation vehicle is a new limited partnership, usually housing a single asset spun out from an existing fund, capitalized by new (and sometimes existing) investors, allowing the GP to “play forward” with a known and high-performing asset.

    “Rather than sell it to another private equity fund or strategic investor, they like the opportunity to play forward a company they know well. So what they do is they capitalize a new vehicle... to buy their company from their fund.”
    — Paul Cohen [03:11]

• Incentives to Use CVs:

  • GPs use CVs because they have maxed out in their current fund (time or capital-wise) but want continued ownership; it provides LPs with liquidity options.
    — [04:49], [07:57]

3. Alignment and Potential for Adverse Selection

• Positive Selection:
  • GPs typically choose their best assets for CVs and roll their own carry, signaling conviction.

    “There’s an interesting positive selection here, the opposite of adverse selection, in that they're choosing not to sell the asset and they want to hold it and they want to also roll up their carry...”
    — David Weisburd [05:42]

  • Diligence is critical, as there are cases where failed auctions result in GPs moving subpar assets into CVs at artificially high valuations.

    “Frankly, what we're seeing a lot today because the markets are so backed up is we're seeing companies that have had a failed auction process that the GP says, ‘Oh, okay, well then I'll do a continuation vehicle on it. And by the way, I want to do the continuation vehicle at the same valuation I couldn't get in the failed auction process.’”
    — Paul Cohen [06:05]

4. The Flow of Funds in CV Transactions

• Stakeholder Roles & Economic Terms:
  • Institutional investors like Agility capitalize the CV, which then buys the portfolio asset at fair value from the original fund.
  • GPs roll their carried interest into the new vehicle, aligning incentives and giving LPs the choice to cash out or roll into the new CV.

    “The GP doesn't take money off the table. The GP rolls that $60 million into the CV and it's their investment into the CV. The LPs... can choose instead of taking cash to roll their capital also into the CV.”
    — Paul Cohen [07:57]

5. CVs from the Perspectives of GPs and LPs

• GP Perspective:

  • Ability to deploy de-risked capital into a known asset, leverage prior operations improvements, and potentially multiply their own rolled carry. New carry structures better align interests (tiered, higher return hurdles before 20% kicks in).

    “It's a de-risked investment for them to make. And it's an investment where they've worked out the kinks... And the economics are really compelling.”
    — Paul Cohen [11:19]

• LP Perspective:

  • CVs offer liquidity optionality and shorter hold periods, and provide a unique alignment versus traditional buyouts.

    “It just gives them optionality... So if they want to, they can take the optionality of rolling their investment and getting a 2 to 3x in a few more years.”
    — Paul Cohen [14:54]

  • Not all LPs agree—some seek immediate DPI due to current scarcity of cash returns in private equity.

    “I had the CIO of an endowment tell me... she was a default yes, in CVs... but the IC was almost a default no, in that they wanted the DPI given the lack of DPI in the asset class.”
    — David Weisburd [10:20]

6. Empirical Evidence: HEC Paris Study

• Findings (HEC Paris, 2018–2023, 300 CVs):
  • CVs outperformed comparable buyouts:
    • CVs: 2.4x total value (1.7x cash returned), less return dispersion (less risk)
    • Buyouts: 1.8x total value (0.8x cash returned)
  • “It's apples to apples, first quartile to first quartile.”
    — Paul Cohen [18:56]

    “CVs had a higher return than buyouts of similar vintage years. They had a higher dpi... and they had a lower dispersion of returns, so they were less risky than the buyouts.”
    — Paul Cohen [17:00], [19:20]

  • Supported by tighter return dispersion (lower volatility). — [23:38]

7. Market Trends and the Lower Middle Market

• Trickle-Down Effect:
  • CVs started in large-cap buyouts—now 50% of the largest 100 funds have executed at least one CV—but are increasingly being adopted in the lower middle market for higher alpha, lower competition, and easier operational improvements.

    “There’s more return opportunity with the smaller companies... It’s easier to double a company that has $10 to $15 million of EBITDA...”
    — Paul Cohen [22:06]

8. Independent Sponsors: The Next Frontier

• Definition & Scale:
  • Former fund managers or deal professionals who raise capital deal-by-deal rather than via a blind pool fund.
  • 1500+ in North America; the deal volume rivals or exceeds that of traditional funds, though at smaller figures per deal. — [24:29]
• Growth Factors:
  • Investors seek lower middle market exposure and the ability to pick deals; professionals enjoy the path to track record and eventual fund formation.

    “There’s tremendous deal flow there and the investor gets the option to choose which deals they go into. So the perception... is that they're minimizing risk...”
    — Paul Cohen [25:41]

9. Evolution of CVs and Strategic Lessons

• Prediction for the Next 10 Years:
  • Segmentation of the CV market; single asset CVs in the lower middle market will become nearly indistinguishable from buyout firms in structure and approach.

    “When you look back 10 years from now... they're just going to look like buyout firms accessing buyouts through partnering with sponsors.”
    — Paul Cohen [28:29]

  • Asset allocators may be missing out on the best companies if they only invest in buyout funds, not CVs.

10. Alignment, Ethics, and Conflict Management

• Asset Management Incentives:

  • Top GPs are professional and generally ethical but may be more focused on asset aggregation and fee generation than performance alignment with alpha-seeking LPs.

    “You can’t survive in the industry for over a long period of time if you’re unethical. ... These firms are really just asset aggregators, raising bigger and bigger funds, rolling out new strategies all the time.”
    — Paul Cohen [34:41]

• CV Conflict Mitigation:

  • Market norms (valuation policies, third-party fairness opinions/bank-run processes) act as regulators to prevent GP self-dealing in CVs.

    “There is a conflict of interest... but... most CVs are done around the current [market] value. ... The gold standard... 99.9% of GPs hire an investment bank to run a process.”
    — Paul Cohen [37:48]

11. Timeless Career Advice

• Trust Your Gut Around People:

  “Trust your gut, especially when it comes to people… If alarm bells go off, don’t invest in that person.”
  — Paul Cohen [39:50]

  • Quick corrective action, especially with underperforming CEOs or management, is almost always better than waiting.

    “If you need to make a change at a company, make it quickly. ... If you rip off that band aid, it’s much better to do them quickly.”
    — Paul Cohen [39:50]

  • Most management teams are relieved when necessary changes are made.

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Notable Quotes & Memorable Moments

• On DPI famine in PE:

  “If you look at the DPI, the cash coming back to investors since really the 2018 vintage, it’s been really low. There’s been a famine.”
  — Paul Cohen [02:50]

• On positive selection bias in CVs:

  “The best diligence is to be an existing investor. ... By nature, diligence has a sales aspect to it, but they're on the inside. So it’s de-risked as well.”
  — David Weisburd [13:45]

• On alignment and optionality for LPs:

  “This gives them an opportunity to get liquidity through the CV. But if they want to… get a 2 to 3x in a few more years. So it gives them optionality.”
  — Paul Cohen [14:54]

• On risk and dispersion:

  “There’s a much narrower dispersion of returns in the CVs versus the buyouts, which implies it’s less risky.”
  — Paul Cohen [19:20]

• On GP asset management incentives:

  “The more assets that they manage, they get a management fee off of those assets, and that fee can get very large, even if their performance is just median performance...”
  — Paul Cohen [34:41]

• On self-dealing safeguards:

  “I think that this self dealing part has really been mitigated because the market recognized this conflict of interest.”
  — Paul Cohen [37:48]

• On career wisdom:

  “Making mistakes is inherent in becoming a good investor… If alarm bells go off, don’t invest in that person.”
  — Paul Cohen [39:50]

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Important Timestamps

• [01:13] – Dramatic growth and size of CV market
• [03:11] – What is a continuation vehicle? Explanation and example
• [05:42] – Positive vs. adverse selection in CV assets
• [07:57] – Detailed flow of funds in a CV transaction
• [11:19] – Why CVs are compelling for GPs (economics and de-risking)
• [14:54] – LP benefits in CVs and the psychology of liquidity
• [17:00] – HEC Paris study: performance and risk findings for CVs
• [22:06] – CV adoption moving from large-cap to lower middle market
• [24:29] – Definition and landscape of independent sponsors
• [28:29] – Evolution of CVs: Lower-middle market and buyouts convergence
• [34:41] – Asset management incentives and GP-LP alignment
• [37:48] – Process safeguards and conflict of interest mitigation in CVs
• [39:50] – Paul Cohen’s timeless career advice

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Closing Thoughts

Paul Cohen delivers a comprehensive and practical view of how continuation vehicles are transforming private equity, with clear frameworks for evaluating alignment, risk, and opportunity. He advocates a disciplined, aligned, and operationally-focused approach to investing in both CVs and independent sponsor deals, especially in the lower middle market where alpha opportunities remain. The episode blends macro trends, hard data, anecdotes, and timeless advice, making it essential listening for institutional investors and asset allocators seeking an edge in private markets.

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Transcript

[Paul Cohen]

HEC has done the most comprehensive study that I've seen and they've collected data on 300 CVs. And these are CVs that were created from 2018 to 2023. And what they found, the bottom line is that CVS had a higher return than buyouts of similar vintage years. They had a higher dpi, so they delivered cash back to investors more quickly than buyouts. And they had a lower dispersion of returns. So they were less risky than the buyouts.

[Podcast Host (How I Invest)]

Welcome to the How I Invest podcast.

[David]

Where we explore how top institutional investors make their very best investment decisions. Today I'm speaking with Paul Cohen, Managing partner at Agility Equity Partners, where he leads investments across the private equity landscape with a focus on the fast growing continuation vehicle and and independent sponsor market. We dig into the explosive growth of the CV market, the institutionalization of independent sponsors, and the overlooked opportunities in the lower middle market. Without further ado, here's my conversation with Paul. So tell me about the size of the CV or continuation vehicle market today.

[Paul Cohen]

So the size of the market in 2024 was $70 billion. And to put that in perspective, the size 10 years ago was $7 billion. So it's just been growing dramatically.

[David]

From my understanding, the continuation vehicle market grew 30% in the first half of this year. Tell me about that and give me some numbers on that.

[Paul Cohen]

Yeah, that's right. So it grew 30% first half of 25 versus 24. So it's grown to about $50 billion that this year versus 31 last year. So it's on pace, you know, to hit $100 billion versus 70 last year. It still continues to grow, interestingly versus buyouts. The amount of, if you measure the amount of dry powder to deals done in buyouts, it's about kind of 4 to 1. And if you look at it for secondaries, and we don't have it specifically for cvs, it's close to one to one. So the market's been growing, you know, as fast or faster than capital coming into it. It's really a capital constrained market.

[David]

That's one of the concerns in the market right now is there's no DPI and large buyouts and that there's too much capital going after too few opportunities. In fact, I just spoke to a fairly large CIO and he mentioned that they expect the investment period for large buyouts to be closer to four to five years. And just to give you context, in 2021 was 18 to 24 months.

[Paul Cohen]

Wow. Yeah.

[David]

Managers, even though they have a very Strong incentive to deploy and to raise more funds and to show that they were working for their management fees. They still are taking a long time to deploy it in large buyout.

[Paul Cohen]

Yeah. And if you look at the DPI, the cash coming back to investors since really the 2018 vintage, it's been, it's been really low. It's been. There's been a famine.

[David]

And just taking a step back, how would you go about simply explaining what a continuation vehicle is?

[Paul Cohen]

We've sized the market, so I guess it does make sense to explain what the heck we're talking about. So, continuation vehicle, the easiest way to explain it is just to use an example because it's a little esoteric. So I'm going to use an example of a KKR fund. I'm making this up. It's not actual, but say kkr, a buyout fund, you know, has a great company that they invested in three or four years ago. The company has performed really well and might be their best company in their portfolio. And rather than sell it to the another private equity fund or strategic investor, you know, they like the opportunity to play forward a company they know well. So what they do is they capitalize a new vehicle, the continuation vehicle, which is a limited partnership just like theirs, and they're the GP of that vehicle. They raise capital from institutions like Agility Equity Partners, my firm, to buy their company from their fund. So it is an acquisition. They are selling their company out of the existing KKR fund to this new single asset entity that's going to hold the company capitalized by new investors like Agility Equity Partners to enable them to continue to own that company and to benefit from its, its growth.

[David]

Tell me about what the incentives for somebody like a KKR would be to hold that asset in their current fund and what are the incentives for those partners to now sell it to continuation.

[Paul Cohen]

Vehicle to start with, KKR is kind of at an inflection point where they can't hold it in the current fund and continue to grow it. So the fund may be at its fifth, sixth, seventh year. It doesn't have more equity capital to continue to grow that company. And so it's at a natural point where they would exit the company and in years past they'd sell the company. So instead, though, the KKR GP says, gosh, this is a great company, I'd rather not sell it. I'd rather own it for a few more years, but I need to give my limited partners liquidity for their investment. So they use the CV tool to be able to Accomplish both of those things, holding onto a great investment they know well while giving liquidity to their limited partners.

[David]

There's an interesting positive selection here, the opposite of adverse selection, in that they're choosing not to sell the asset and they want to hold it and they want to also roll up their carry into the vehicle, which I know is a huge term for you guys. In which cases would there be adverse selection in that the incentives are aligned for them to do a CV even though they might not love the deal? Does that ever happen?

[Paul Cohen]

And that's a large part of our diligence, is making sure what we tell our investors is that we have the opportunity to invest in the best companies of the private equity firms with the positive signaling that you're mentioning that the private equity firm wants to hold onto it. But you have to do your diligence because not all these companies are great companies, at least from our perspective. It may be a company that's subject to cycles and it may have had customer concentration. It may have other issues. And frankly, what we're seeing a lot today because the markets are so backed up is we're seeing companies that have had a failed auction process that the GP says, oh, okay, well then I'll do a continuation vehicle on it. And by the way, I want to do the continuation vehicle at the same valuation I couldn't get in the failed auction process. So that's not a good deal for us. That's not alignment of interests.

[David]

Large buyouts have so much dry powder. And if you're not able to sell that through a process, that is not a good sign in this market.

[Paul Cohen]

Right, right. Yeah. These are high quality companies we're investing in that should be able to sell in any market. And actually we'll talk about it later, but our DPI kind of shows that because our DPI is very strong because these are very high quality companies that can sell even in this market.

[David]

So maybe you could double click on the process from going from a fund to a continuation vehicle. Who are the buyers? Who are the sellers? Who's rolling their capital, Whose net new capital? So walk me through kind of a basic rudimentary explanation of the flow of funds.

[Paul Cohen]

Sure. Well, the buyer is the continuation vehicle. So the first flow of capital, if you will, our institutions, like Agility, invest into that cv. We capitalize the CV and then that CV is the buyer that in my old example buys the company out of KKR. So from the KKR's fund perspective, it just looks like they're selling a company just like any Other company they'd sell in their portfolio. It just so happens they're selling it to themselves, but with a new, with the new investor base. And then ultimately the capital that the CV uses to buy the company with the fund trickles down to the limited partners. Now, there are some nuances to that and you actually mentioned one is let's use some numbers. Let's say the KKR bought this company for 100 million originally three years ago. They want to do the CV and now the company's worth $400 million. So the $400 million goes to the KKR fund from the CV. CV raises $400 million. CV actually raises say $480 million because they also want to raise growth capital, but. And then 400 of it goes down to the KKR fund to buy the company. The GP is owed, carried interest, 20% of that, 20% of the gain. So they bought it for 100, sold it for 400 series. $300 million a gain, 20% of the gain, $60 million. The GP doesn't take money off the table. You mentioned this before. The GP rolls that $60 million into the CV and it's their investment into the CV. The LPs, you know, get the $340 million. If my math right, $340 million flows down to the LPs and, but the LPs can choose instead of taking cash to roll their capital also into the cv. So if they decide they want to be a buyer, the smartest people around the table that are closest to the company have decided they don't want to sell. So maybe the LPs want to earn another two, three times on their money. They have the opportunity to roll into the CV also. Or they can take cash. Most of them take cash.

[David]

I had the CIO of an endowment tell me that by default. She was a default. Yes, in cvs. In other words, most of the time she was leaning yes. Obviously you have to do your diligence and all that, but. But she liked the, the asset class. But the IC was almost a default, no, in that they wanted the dpi given the lack of DPI in the asset class. So you have this interesting, I guess, psychological element of it that goes above and beyond what is the expected value and where is the, the kind of the stone cold math on the investment. Sometimes some LPs just want to have.

[Paul Cohen]

DPI, right, and they want to deploy it into the, you know, their next best investment. Also they think they can get a 2 to 3x on. So yeah, I can't blame them for, for that.

[David]

Maybe you could tell me why would a GP want to do a continuation vehicle on their asset?

[Paul Cohen]

What's the incentives they're looking at buying a company that they know really well, they already own it, but buying it in another pocket. So they know this company really well. So it's a de risked investment for them to make. And it's an investment where they've worked out the kinks and if you will, they've upgraded the management team, put the systems in place and really importantly, they've developed the growth levers and executed on the growth levers and they see continued white space to grow the company. So they know it really well. So why not invest in that company instead of, or in addition to, you know, another company that they're, you know, 60 days to do diligence on, you know, has all the heavy lifting ahead of it. So it's a de risked investment for them. And then the economics are really compelling. So in the example I had before, they took their carry and rolled it into the new CV. So what did I say the carry was? $60 million I think in that example. So they have the opportunity for starters to take that $60 million in carry and if they think on a DE risk basis they can turn that into 120 to a $180 million, you know, double or triple it. That's a great investment just there of their own capital. And then in addition to that, the CV has capital we raised. In my fictional CV, I think $480 million of capital, 400 of it was to buy the company. 80 million was to invest in growth post closing. Some of that's going to be debt as well. But they manage that capital like a fund and they get carried interest on all that new capital. The one difference on the carry side I just will mention is that in your typical buyout fund they get a 20% carry. The GP after an 8 to 10% hurdle rate to the LPs. In the CV world we align interests a little better than that. We have a tiered carry so your typical GP doesn't hit the 20% carry until we agility and our investors get at least two times our money back and at least a 20% IRR. So you know it's better, better aligned but you know that's a huge amount of extra carry that they can get in addition to being able to triple their own invested capital.

[David]

So said another way, the GP has done the work and which means provided a lot of the value add, created these systems to Obviously they have to continue working and continue managing. But a lot of these systems have been set up, so they've done the value add and now they could essentially compound the returns from that value add. And two is there's a paradox investing is that the best diligence is to be an existing investor. So they've gone under the hood, they've been on the board, the portfolio CEOs are no longer in sales mode. They're actually in like operating and management mode. They've seen the data points from how they communicate, from how they grow, how they execute. So they have more information on this current company than any possible, than, than could be done theoretically through any diligence process. Because by na. By nature, diligence has a sales aspect to it, but they're on the inside. So they're. It's de risked as well.

[Paul Cohen]

Exactly.

[David]

We talked about why it's attractive to GPs. Why are CVs so hot for LPs and why are so many LPs piling into the CVs?

[Paul Cohen]

So for the LPs that are sellers, that are investors in the KKR fund, it just gives them optionality. So as we said early on, there has been a dearth of distributions since 2018. So for a long period of time. So this gives them an opportunity to get liquidity through the cv. But if they want to, they can take the optionality of rolling their investment and getting a 2 to 3x in a few more years. So it gives them optionality. Like we said earlier, most of them take cash. And I think your question was also from LP RLP perspective, what's attractive about it? So from NLP's investing into an agility, the attraction is, you know, everything I mentioned before is we're getting an opportunity to invest in a de risked investment. Our hold periods are shorter because, you know, they've already done the heavy lifting in the first few years on the investment. So typically we're looking at three to five years and we have a mechanism to actually, you know, force an exit. An exit if it, if it doesn't happen. And also there's this uncommon alignment that we have with the gp. We're not on the other side of the table where they're trying to, you know, paint the. Well, I won't say it, but where they're trying to, you know, tell us.

[David]

Let'S use the word frame narratives.

[Paul Cohen]

There you go. Where they're framing the narrative very positively relative to our questions and our diligence, we're on the same side of the Table essentially with the gp, because they're buyers also and we are tremendously aligned. So it's a really nice de risked shorter term investment opportunity for RLP's.

[David]

So tell me about the HEC Paris study on continuation vehicles or CVs.

[Paul Cohen]

Sure. Well, HEC has done the most comprehensive study that I've seen. It's hec, the Paris School of Management, and they've collected data on 300 CVs, so it's a pretty large sample size. And these are CVs that were created from 2018 to 2023. So the only problem is it's not a mature industry yet, so it's not mature sample size. But they compared the CV returns against buyout returns and what they found, the bottom line is that CVs had a higher return than buyouts of similar vintage years. They had a higher dpi, so they were delivered cash back to investors more quickly than buyouts and they had a lower dispersion of returns, so they were less risky than the buyouts. And then applying some real numbers to that, if I look at 2018, which is the oldest vintage they collected data on, you'll see that single asset CVs, that's what we invest in at Agility, had a total value of 2.4x and 1.7x was actually returned in cash with about 700 basis points of remaining value. So 1.7 cash on cash return for the 2018 vintage with a 2.4 total value versus buyouts in the same year that had a 1.8x total value. So 1.8 compared to 2.4 and they'd only return 0.8x, so most of their value was still in the portfolio and not translated into cash. I should note that the stats I'm giving you are for the first quartile, so for the best funds. But you can see that it's really compelling.

[David]

Is it apples to apples or is it first quartile CVs versus first quartile P?

[Paul Cohen]

It's apples to apples, first quartile to first quartile.

[David]

And you could also make an argument, which I'm not sure if you're doing, which is not only do they perform better, but they're also de risk based on the factors that we said, which is the GPS know the management teams and they're more compounding than doing kind of these highly disruptive changes within the company.

[Paul Cohen]

Exactly. And I am making that argument and HEC is backing up that argument with their data, which does show that there's a much narrower Dispersion of returns in the CVS versus the buyouts, which implies it's less risky.

[David]

So the CV asset class does not live in a bubble. It also is affected by specifically the returns of private equity. The lack of DPI in private equity. How does that lack of DPI play into the effects on the CV market? Does it affect the market in any way?

[Paul Cohen]

Yeah, David, it's definitely expanding the market because it's viewed as another exit alternative in a market where it's difficult to exit companies. So, you know, last year about 15% of exits were through CVs and that's coming up from, you know, a decade ago. It was practically zero. It is viewed as an exit alternative. But the only thing I'll add is that that's not the only reason that CVs are growing. CVs are also growing because as we mentioned before, the GPS recognize it just as a great way to play forward is know their their best assets.

[David]

Said another way, if you know the asset, you know the risk, you know the management team, why would you sell that asset and buy an unknown asset to replace it? It kind of doesn't make make sense on a first principle basis.

[Paul Cohen]

Yep. I need to take you on my roadshow.

[David]

Taking a step back, CV started on larger buyouts, so tell me about how they started. And I know you focus on lower middle markets, so let's start with why CV started upmarket and how that's evolved over time.

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[Paul Cohen]

Yeah, nearly everything, at least in private equity does start up market and then the trends continue down market. So right now for the largest 100 private equity funds, 50% of them have done at least one CV. Some of them have done multiple CVs, you know, out of different funds. And, and that is starting to bubble down, down, down market, you know, on the, on the. Why down market? You know, why are we interested in, in, in the lower middle market? You know, it's like it's buyouts in general. There's more return opportunity with the smaller companies versus the bigger companies. So, you know, it's easier to double a company that has $10 to $15 million of EBITDA than a company that has $100 million of EBITDA. And you also get the impact of multiple accretion by growing smaller companies to the next level of buyers versus the larger deals where you don't have that opportunity. So there's a lot more alpha, there's a lot less competition, which is also part of that.

[David]

You mentioned earlier that HEC Paris study saw that CVS were less volatile. How is that measured and why do you believe CVS are less volatile than traditional bio?

[Paul Cohen]

Well, HEC measures it by return dispersion. So they look at all the returns in their data set and the, you know, how far they, they disperse from the mean. You're asking me to do statistics, which I'm not great at, but. And you know, there's a tighter dispersion with the CVS than there is with the buyouts, which, you know, indicates, indicates lower risk. And I forgot the second part of the question.

[David]

So essentially you have the expected value which, which is kind of the, the fitted line of returns and then you have the noise around that. So if the standard deviation is, is much tighter on it, then, then that's, that's how you measure risk.

[Paul Cohen]

Exactly. Stated much better.

[David]

You also invest in independent sponsor deals. So tell me about that market today.

[Paul Cohen]

Yeah, yeah. So, you know, first of all, and I'm sure, sure most of your listeners know, but you know, an independent sponsor, for those that don't know, you know, these are, these are buyout professionals, but they raise capital on a deal by deal basis instead of raising capital into a blind pool fund to invest later. So it's a very large market. So there unfortunately is not much data on the market, but there's said to be about 1500 independent sponsors in North America. You know, our database at Agility has about a thousand of them and it continues to grow all the time.

[David]

And how much in deal volume is being done with independent sponsors.

[Paul Cohen]

It's not hard data, but what, what the common theory is that there's actually more deals done by independent sponsors every year than they are from the dedicated buyout funds. Now these deals are a lot smaller, but, you know, there's, there's a lot of them.

[David]

And why are independent sponsors growing so quickly? Why is that market growing quickly? What are the confluence of factors?

[Paul Cohen]

There's a bit of a supply demand going on here. So on the demand side I'll start with is that investors are recognizing that there is a better return profile in lower middle market deals than there is in kind of the mega buyout deals. Some go to the mega buyout because they've got managers that are reliable and safe and there's a lower beta. But there is an increasing demand for lower middle market deal flow. And so they're going to independent sponsors because as I said, there's tremendous deal flow there and the investor gets the option to choose which deals they go into. So the perception of the investor is that they're minimizing risk or reducing risk because they get to make the investment decision on each investment. On the supply side, there are more professionals that are joining the ranks of independent sponsors. And at least my theory is that since there has been a hard time raising funds over the past number of years, kind of corresponding with the lack of DPI to invest in funds, you've got kind of mid level or mid to upper level private equity folks that, you know, don't have a great path forward, you know, to partnership and wealth creation. So they're leaving private equity firms and they are becoming independent sponsors. And the typical path of an independent sponsor like that is they want to do a few deals as an independent sponsor, raising capital on a deal by deal basis, and then use that track record, track record to raise a fund. I mean, it's similar to agility. I left my prior institutional firm, Fort Washington, and we've done eight deals basically as an independent sponsor. We did have one small fund that we raised during that period. But basically as an independent sponsor, it's allowed us to do a few things, it's allowed us to build a track record, but importantly, it's also allowed us to build a team and become more institutional so that we can raise a fund rather than me going out with a PowerPoint with Paul Cohen trying to raise a fund on my own.

[David]

And also it allows you to do deals versus marketing a hypothetical deal. So it allows you to actually get more reps as an independent organization. So just more useful as a GP.

[Paul Cohen]

Exactly.

[David]

You've been doing this for 15 years now. What are some of the most non obvious lessons that you've Learned.

[Paul Cohen]

On the CV side? Where I see CVs developing, especially single asset CVs and these midhold equity recaps is that they're just going to develop into the buyout market. So right now we've got secondary players that are putting them into their very diversified portfolios. We've got, yeah, the market grew out of the secondary industry. So you've got people that are used to evaluating portfolios, not necessarily deals, although they're all quite good. But what I think is when you look back 10 years from now, what you're going to see is the market's going to segment and in the part of the industry that we focus on, in the lower middle market, single asset cvs, they're just going to look like buyout firms. I mean that was the thesis for agility is that I wanted to build a team of buyout professionals, bring a buyout culture to the market that not only did buyout style diligence, but also was focused on value creation. Post investment we have operating partners, you know, like, like a buyout fund. In our last deal that we closed investment we closed, we brought in an operating partner that was the COO of FedEx. And so he was a logistics guy, this is a logistics company. He's serving on the board for us. Just like a buyout fund would bring somebody like that. Then finally you're going to see the portfolio composition look like a buyout fund. So your typical buyout fund has a dozen plus or minus investments in it. They're fairly concentrated. Your typical secondary fund, or the mindset of the secondary fund is to have large diversified portfolios to mitigate risk. We don't think you need to do that. We're mitigating risk with the alignment that we have with the GP with where we're entering the market, partnering with these sponsors. Now of course we've got a due diligence to, you know, validate that we've mitigated that risk. But we can put together a portfolio of a dozen companies that are somewhat de risked versus your traditional secondary portfolio. So we have the luxury of building a concentrated portfolio where any one company can deliver an outsized return and move the needle versus your traditional secondary mindset, which is very large diversified portfolio focused on mitigating any downside. So long answer. Ten years from now, I think these firms are just going to look like buyout firms accessing buyouts through partnering with sponsors. The only other thing that occurs to me as being non obvious is that the asset quality that you have of these companies going through the CV market are the best assets of these buyout firms or independent sponsors. They're not getting sold as they did in years past upstream to the next largest private equity firm. So if you're an asset allocator, and I know you have a lot of asset allocators paying attention to your podcast, if you're an asset allocator, a lot of great companies are slipping through your opportunity said. If you're just investing in buyout funds to access great companies, you're going to need to think about how you want to play the CV market to capture the deal flow from these very high quality companies.

[David]

From an allocator perspective, they're concerned about large buyouts is that dying market or a market that's going to be very difficult to outperform even the S&P 500 with illiquidity, which is just inferior asset. But at the same time they do want to invest into private assets. So I think they look at it more like we need exposure into private equity. What is the best way to play that? You mentioned secondaries, you could go lower middle market, you could go into cvs, you could go into independent sponsors. So they're, they're looking for what is the best player for this private equity position. Position on a risk adjusted basis.

[Paul Cohen]

And they're having a tough time right now trying to figure out what we are the firms that focus on single asset CVs and we're not the only one where to bucket them. Is that a secondary? Is it a buyout? Is it somewhere in between? And we don't have an in between bucket. What I would say is like I said, In 10 years from now we're just another way to play buyouts. And the data is showing that our returns are just as compelling as buyouts. We're just accessing them through a different channel.

[David]

GP stakes is a great example of this phenomenon because it's in some ways cash flowing because you get management fees from day one. It has equity components because you're investing into the underlying manager. And sometimes you could invest into private credit manager. So it has a private, private credit component. So it's still, it's still an issue to this day. Even though it's balloon now to a $70 billion market, you have this unique vantage point in that for 15 years you've seen hundreds of GPs on a yearly basis. I want to really unpack the ethics of the top gps. So you've seen them kind of start and you've seen how their careers have progressed. On a scale of 1 to 100, where are the GPS that have grown into the largest franchises? How do they fit from a 1 to 100? On an ethical standpoint, are they the most ethical? Are they kind of like ethical with some pragmatism? So are they not ethical? So how would you look at the ethics which I would define as being aligned with their LPs and portfolio companies.

[Paul Cohen]

But that seems like a question that just going to generate a lot of hate in the industry for.

[David]

It's not meant to.

[Paul Cohen]

I hate the word ethics. I like your definition. You know, maybe as far as alignment rather than ethics. Because yeah, I wouldn't say I don't see unethical gps. You know, by and large you can't survive in the industry for over a long period of time if you're unethical. But, but I will say, and I'll state the obvious here, is that GPs are motivated to manage assets. The more assets that they manage, they get a management fee off of those assets and that management fee can get very large, even if their performance is just a median performance and not top quartile performance. So there is a motivation to grow your asset base and certainly we see that in spades at the top end of the private equity market. These firms are really just asset aggregators, raising bigger and bigger funds, rolling out new strategies all the time. And investors stick with them because they're certainly very professional, very institutional, and they're fairly reliable, at least in being able to deliver median returns. But what you lose is the opportunity to get kind of those top tier returns. You may get it this fund or that fund, but I'd say down market, the hungrier funds that aren't able to buy their house in the Hamptons just based on management fees or are working for carried interest. That's still where the play is. But I wouldn't use the word ethical. I think they're all ethical and you.

[David]

Know, great, they all follow the rules, but they're not necessarily all aligned with Alpha seeking LPs.

[Paul Cohen]

That's right.

[David]

There's this something that I found is there's very few purely alpha LPs that are highly focused on that as their North Star. Although to be fair, a lot of the mandates are not to maximize alpha, it's to deliver a certain return with a certain level of risk.

[Paul Cohen]

That's right. I Mean there, there is alpha and beta and you know, some, some allocators and I can't argue with them, you know, are more focused on the blend, if you will, maybe risk, maybe it's risk adjusted alpha. So you know, investing in a large firm that's gives them reliable median returns outweighs having to pick over the smaller managers where there's the more beta. So they've got to find.

[David]

There's also essentially this self dealing that comes in that could come play in cvs where you underprice an asset. Do you see a lot of successful GPS doing this or is it the ones that play nicely with all LPs and transparently are the ones that you've seen have grown into the biggest asset managers?

[Paul Cohen]

Yeah, I mean that's a great question you're talking about. There is a conflict of interest, you know, inherent in a CV because your buyer, in my example kkr, was selling the company out of one fund, buying it into the CV into this new fund of one asset. So there's a conflict of interest of having them on both sides of the table. There's some regulators for that conflict and we see most everybody adheres to those regulators. The first is your valuation policy at your firm. There is a need to mark your portfolio to a market valuation as measured with comparables and DCFS and all other things. So you know, LPs should have some comfort that the portfolio is marked to market and most CVs are done around the current value. So at that market value. Second regulator is that it's the gold standard in 99.9% of GPs. Hire an investment bank to run a process. So there's, you know, more than one buyer around the table. So it is a process. Even if in our part of the market it's not that competitive, there's only a few of us, there is a process. We just can't steal a company colluding with the GP to only offer 80 cents on the dollar or something for it. I think that this self dealing part has really been mitigated because the market recognized this, this conflict of interest.

[David]

So if you could go back to 1985 when you finished your MBA program, I'm not trying to age you, but. And you could give one piece of timeless advice for Paul as he was graduating his MBA program, what would that timeless piece of advice be?

[Paul Cohen]

First of all, I skipped one year of graduate school or undergrad and when went straight in. So if you're doing the math, at least subtract a year from my age. What Would I tell. This is a really great question. What would I tell young Paul? First of all, and I apologize to young Paul that I think that making mistakes is inherent in becoming a good investor. So I wouldn't want to tell young Paul all the mistakes I've made. And I've made, know, numerous mistakes because, you know, that's what really makes you a good investor. It's the those scars that heal over that make you a better investor more than your successes, which sometimes just come with, you know, luck of timing or, you know, execution by a management team that you're not involved with or something. A couple things though, I think I would tell young Paul is the first is just a bit of advice and that's to trust your gut, especially when it comes to people. So you're going to come across people that are just not going to, you're going to set off alarm bells for you. I had a deal early in my career where I was told that the CEO was a diamond in the rough. That was a quote I remember, it's like 30 years ago. I still remember the quote. I was co investing with another firm on this and the head of the other firm was like, this guy is just a genius, a great investor. He's a diamond in the rough. When I heard him, the CEO, I kind of walked out the meeting thinking, what did he say? We've all had meetings like that where you really have no idea what the guy said. And my alarm bells were going off, but I, instead of listening to my gut, I listened to the other investor who frankly was more senior than I. More reps and such made the investment. Ultimately, this guy turned out to be a really bad egg and did some bad things and we had to replace him. A mentor of mine in investing had a great quote that I still use today saying there's no called strikes in investing. So if you see a pitch and you don't swing, no strike, even if it's a great investment later on, don't look back. But if you swing and you whiff because you invested behind a bad person or a bad company, you're stuck with that in your track record, in your sleepless nights. So trust your gut is the first thing that I would say because the people are the most important thing. And if alarm bells go off, don't invest in that person. And then the second bit of advice I give is really along those lines, is that if you need to make a change at a company, make it quickly. There's always the thought that it's going to Be disruptive. And should I do it? For instance, if a CEO is underperforming, you need to replace them, or you need to cut off a product line, or you need to cut costs. All these really hard decisions, they are disruptive. But if you rip off that band aid, it's much better to do them quickly and than to wait and to let things, you know, continue to slide in the wrong direction. So those are two mistakes, I guess, I have made in my life that I would advise myself on. Listen to your gut. I think there was a book on that, too. You're really good at this, identifying this. You can gauge people in like three seconds or something. I can't remember what the book was.

[David]

Blank. Malcolm Gladwell.

[Paul Cohen]

Yes, exactly. So that's my advice.

[David]

When you have terminated people quickly, have you ever regretted that?

[Paul Cohen]

I haven't. And actually what I've had is the other member. You probably had this too. Other members of the management team say it's about time. They generally are like, they're just relieved that you finally made that call. They're not comfortable necessarily calling up and saying, get rid of my boss, because that's a career ending move. But usually they say, gosh, it's about time.

[David]

Yeah, I've. I've never had that happen either. I'm still looking for, for someone to. To disagree with that premise, but I think there's some kind of evolutionary purpose for not wanting to get rid of people. So by the time that you really need to get rid of somebody, I think it's almost always late. So you can, you can never be too early. I think about these lessons, which are basically these learnable lessons and these unlearned, unlearnable lessons. I think some lessons you have to experience yourself or we're just too stubborn to learn from others. But the other ones is why I have the podcast, which I'm able to interview people like you learn from your mistakes, kind of the learnable lessons part of it, which I probably say at least 80, 90%, and then hopefully have the wisdom to. To integrate lessons from somebody else without having to feel the painful lessons myself. But those 10 to 20% are irreducible and they must be made, which is why the smartest people in the world are not the richest. If you could learn and sit and listen to podcasts all day long and become great people would do that. It's much better than making your own mistakes. But I think both are important. I think people fall in these kind of camps of doing versus learning. I think a healthy combination of both is the most optimal way to accelerate your growth.

[Paul Cohen]

But you're saying listening to why I invest is not a wealth creation exercise.

[David]

Okay, it is not. It is necessary, but not sufficient. This has been absolute masterclass on continuation vehicles, independent sponsors, just how to think about creating structural alpha in the buyout space, which I think is missing today. What would you like our listeners to know about you, about agility, equity partners, or anything else you'd like to share?

[Paul Cohen]

Well, you know, first of all, David, you know, you know, thank you very much for asking me to participate. Your, your podcasts are excellent. Agility we're trying to get across is, you know, that we're not just buying tail end assets. We are here to provide, you know, equity capital for lower middle market buyouts of sponsor LED transactions. And we're not looking to do tail end deals. We're actually looking to provide the fuel for companies to grow while they're in their growth stage. These are high quality companies.

[David]

Paul, we've known each other for half a decade now and you're a finance nerd just like myself. Look forward to continuing the relationship and meeting live soon.

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