Transcript
Podcast Host (0:00)
Today at tpg, you focus on a
David (0:02)
very specific part of the secondary market. Tell me about that.
Michael (0:05)
Every sponsor at some point in their history has owned a great business. They've made four or five times the money and they sold it to one of their competitors because they needed to get cash back. Their investors were looking for dpi. The management team was giving them some pressure to say, we've done what we said we would do. You've made, we could make five times the money. It's time to reset or you're at the end of the life of a fund. The fund is out of, you know that houses the company is out of, time is out of money. All these are different pressures to sell. Historically, the sponsor would simply say, thank you very much, we've made five times the money and I'm going to sell the business to one of my competitors. Notwithstanding, I see a lot of upside. Their competitor would then go on to make four times the money, and so on and so on. And I would go to the sponsor and say, do you remember that company? And they'd go, oh, of course I remember that company. There was so much Runway left, but we had to sell.
David (0:55)
How do you know that you're not being adversely selected? In other words, how do you know that the GP is not just taking
Michael (0:59)
a free option, but what's critical about this business is to approach it with sector expertise, to approach it like a private equity business a private equity investor would do. And to that end, the core judgment if I were to distill things down for us, is at the point of entry, at the time that we're facilitating a liquidity option for the existing investors and buying in to the continuation vehicle. We want to make sure that they could sell the business today if they could. And they're actually taking a proactive choice not to do that. They're realizing five times the money, creating a lot of liquidity or potential liquidity for the general partner. But instead of putting it into the bank, which they could do if they could sell the business today, they're not. They're rolling it all into the new deal.
David (1:44)
I want to double click on something you said, which is that you approach it from a buyout side, not from an LP side, meaning you're underwriting the asset from the bottoms up, just like a Blackstone. KKR and Apollo would talk to me about that.
Michael (1:57)
At our core in investing in single asset continuation vehicles, we as a group are investing hundreds of millions of dollars into single companies. And hopefully it's almost self evident why Approaching that investment activity like a private equity firm, like a private equity investor just makes intuitive sense. By contrast, the origin story of the secondaries market is actually not doing that. Six or seven, seven or eight years ago if a single asset deal was brought to the secondaries market, the incumbent firms would have said what's this you've called the wrong person that requires a private equity skillset. We don't have that. But what's one of the tremendous things about the secondaries market is innovation. And where the innovation started was in the LP business. And just by contrast in my time at cpp, just to talk about the specialist skills that were required for that kind of investment activity, the largest at the time portfolio that we ever acquired was 65 fund interests, 15, 20 companies per fund. A thousand companies, like literally a thousand companies. So as you think about the skills that are required to do that and the people and the systems and the know how underwriting individual companies, frankly almost irrelevant. There's a thousand of them. What you need to be is I used to say right on average, so half the companies could underperform whatever you were expecting. So long as the other half outperform you work out okay, on average. You can't use that average concept in putting 6, 7, $800 million into, into a single company. You got to be right every time. So this, this market, the secondaries market I think is, is a really fascinating one in that there's been huge, huge growth and underpinning that growth has been a lot of innovation and actually with it different segments have emerged, each of which are large, interesting, they can be different, but each require their own in my view, specialist skills. And that was the opportunity set that I saw sitting back at CPP years ago. And we're now five years into going after that opportunity in a private equity driven way in a highly differentiated manner.