Insightful Investor – Episode #6
Guest: Tony Cusano (Co-founder & Managing Partner, Banner Ridge)
Host: Alex Shahidi
Date: February 6, 2024
Episode Title: Private Markets, Secondaries
Overview
This episode dives deep into private markets with Tony Cusano, focusing especially on the world of private market secondaries. Tony shares his entrepreneurial journey, how he built Banner Ridge into a $7B+ alternatives manager, and what truly creates an ‘edge’ in secondary investing. Listeners get a candid look at the nuances of private market investing, the evolution of the secondaries market, and the leadership lessons Tony learned along the way. The conversation is rich with counterintuitive insights, practical wisdom, and direct commentary about how to find—and maintain—advantages in an increasingly competitive arena.
Tony Cusano’s Background and Entrepreneurial Roots
[02:13–13:24]
- Tony grew up entrepreneurial, running multiple small and creative businesses before college (surfboards, neon signs, college textbooks resale, property management).
- Big break was starting and selling an IT consulting business right out of college, using proceeds to buy a house and enter finance in 2007.
- Personal family experience during the dot-com bubble (parents losing money due to broker account “churning”) motivated his entry to investment.
- Early career at Stepstone Group (then a small startup, now a public company), covering distressed, special situations, and credit during the GFC.
“If you’re under 35 years old, you really haven’t lived through a major recession. … Living it is just very different.” — Tony [09:27]
- Exposure to private equity secondaries, especially in credit, and recognition of inefficiencies outside buyouts during/post-GFC.
- Joined Sigular Guff (NY) to focus on distressed and special situations secondaries—pioneered secondary investing in these less-crowded strategies.
- Saw opportunity as possibly “a trade not a business” but realized by 2013 it was structural, not just cyclical.
- Co-founded Banner Ridge in 2019 with ex-Sigular Guff colleagues, scaling the business with software and institutional processes.
- Banner Ridge grew from $0 to $7.2B AUM in just a few years by maintaining its niche and process edge.
Memorable Quote:
“What really drove me into finance was watching my family lose significant money in the dot-com bubble… I thought, I’ve got to figure out how to do this so that never happens to me.” — Tony [05:53]
The Case for Private Markets—and Why the Edge Persists
[13:24–17:19]
- Tony deliberately chose private over public markets for the information advantage.
- Private markets offer meaningful inefficiencies: Relationships and information access can meaningfully improve returns, unlike public markets with largely equivalent information.
- Fragmentation and non-public information keep the gap open; value derived from “relationship business” and how difficult it is to scale relationships or penetrate GP (General Partner) information barriers.
- GPs are “heavily guarded” about disclosing details to prospective secondary buyers, especially outside buyouts.
- Private markets are harder to efficiently arbitrage because “the bar is significantly higher to get in and get the information.” — Tony [16:54]
Memorable Quote:
“It’s hard to get an edge in public markets that’s legal. In private markets, relationships create opportunity for better information, more work with less competition.” — Tony [13:55]
Leadership and Building an Investment Firm
[17:21–23:36]
- Every hire is crucial; culture and performance over retention for its own sake.
- Building software was a major differentiator—“there’s just not great off-the-shelf solutions” for private market pipelines or underwriting.
- Leadership means finding the right people, empowering them, recognizing (and delegating based on) your own weaknesses, and setting cultural standards with accessibility and high partner involvement.
- Growth required Tony to shift from “doing everything myself” (“if you want it done right…”) to trust and delegation, especially to exceptional hires like C.J. Driessen and Scott Halpert.
Memorable Insights:
“You got to get the right people in the right seats on the bus and then be honest with yourself about what you’re really good at—and maybe what you’re not.” — Tony [22:49]
Understanding the Private Market Landscape: Primaries, Secondaries, Co-Invest
[24:03–26:53]
- Primaries: Invest in blind pool—bet on manager and strategy, not yet on assets.
- Secondaries: Buying interests in mature funds (often 4+ years old), effectively stepping into another LP’s shoes.
- Co-invest: Direct participation in one or a few assets, often arranged by fund managers for LPs in specific deals.
The Growth and Normalization of the Secondaries Market
[26:53–29:23]
- Secondaries have lost the stigma (compared to early days, akin to online dating’s rise): “It’s just how it is.”
- Now a mainstream portfolio management tool; GPs no longer insulted by LPs selling, just want to control who buys.
- Volume has grown as acceptance and utility increases—about $110B traded in secondaries in recent years.
Memorable Analogy:
“The secondary market, I kind of view it like what online dating was 15 years ago… There’s no more stigma, it’s just how it is.” — Tony [27:12]
Why Sell at a Discount? Market Inefficiencies and Asymmetry
[29:25–34:07]
- Sellers may be motivated by liquidity needs, portfolio rebalancing, denominator effects (over-allocation), or simply portfolio management.
- Discounts exist due to information lags, indifference to line-by-line pricing in bulk sales, and sometimes because GPs over-mark portfolios.
- Key inefficiency: Buyer may know more about value than seller (“information asymmetry”). Many sellers (especially institutions) are not specialists; buyers can price assets more accurately.
Memorable Exchange:
Alex: “If I own a house… there’s no way the buyer knows more than me... You’re coming in and know more than the seller?”
Tony: “It’d be like inheriting 10,000 houses and you needed money… You’re making a judgment based on the past, which is like driving in the rearview mirror.” [34:07]
Secondaries vs. Primaries: Risk/Reward and Portfolio Construction
[36:12–42:16]
- Secondaries: Evergreen, can pick return by purchase discount; more resilient and sometimes outperforming in downturns.
- Primaries: “Like the Hotel California;” once you’re in, you can’t opt out. Risk is betting on an opportunity “right now” rather than future hopes.
- Downturns widen discounts, offering better entry for secondaries, while raising money is harder so competition drops.
- Private markets can dampen portfolio volatility due to quarterly marks, but ultimate correlation to publics may be higher in reality.
Developing and Sustaining Edge in Secondaries
[42:16–47:25]
Tony identifies four key moats:
- Neutral Buyer Status: GPs must approve secondary buyers; competitors not allowed.
- Primary Capital Relationships: Being a primary LP creates access, info, and trust.
- Team with Direct Experience: Underwriting skill and accuracy are essential.
- Proprietary Software: Rapid, organized information processing is a true differentiator.
“Having primary money gives GPs a reason to be in front of you more frequently… Having software that organizes information in a smart way—giving your team the right info at the right time—is incredibly differentiated in secondaries.” — Tony [44:38, 46:12]
Scale, Size, and Alignment in Private Market Management
[47:27–53:11]
- Fees are “priced in” when buying interests, but size matters—a balance between relevance (size) and being priced out of good deals (too big).
- Primary funds’ red flags: rapid fund size increases, poor alignment (minimal GP investment), lack of opportunity today, poor leadership/turnover, and excessive distractions by principals.
- Alignment and skin in the game are critical: “Look for managers that have the overwhelming majority of their net worth tied up in their business.” — Tony [61:12]
Investment Insights: Skin in the Game & What Really Matters
[61:06–64:23]
- Alignment trumps everything: The best managers have significant personal wealth at risk; if things go badly, you want your manager to feel your pain or more.
- Anecdotes: Passed on a co-invest deal where GP lacked meaningful personal exposure.
- Final advice: Follow the money.
“If you really have something special with real alpha… it’s not hard to put a whole bunch of your money into that. When things get hard, you want to know that the managers you’re invested with are hurting as much, if not more, than you are.” — Tony [61:27]
“I’ve avoided a lot of really tough situations by being laser focused on this point.” — Tony [63:28]
Notable Quotes & Timestamps
- “[In public markets,] it’s just hard to get an edge that’s legal. … In private markets, relationships create opportunity for better information, more work, with less competition overall.” — Tony [13:55]
- “The best opportunities… were situations where my team and I had better information about the assets we were buying than the seller did.” — Tony [32:33]
- “You’ve got to get the right people in the right seats on the bus and then be honest with yourself about what you’re really good at—and maybe what you’re not.” — Tony [22:49]
- “The key inefficiency is information asymmetry. … The more skewed, the better the deal.” — Tony [32:44]
- “Secondaries are more evergreen… you can pick your return just based on purchase price discount to NAV.” — Tony [36:22]
Key Discussion Points with Timestamps
| Segment | Topic | Timestamp | |---|---|---| | Tony’s Background | Entrepreneurial journey, entry into finance | 02:13–13:24 | | Why Private Markets? | Information edge vs public, persistent inefficiency | 13:24–17:19 | | Building Banner Ridge | Culture, software, leadership lessons | 17:21–23:36 | | Private Market 101 | Primaries, secondaries, co-investment explained | 24:03–26:53 | | Secondaries’ Growth | Market stigma, normalization, volume | 26:53–29:23 | | Discounts & Inefficiency | Why sell at a discount, buyer’s information edge | 29:25–34:07 | | Secondaries vs Primaries | Risk/reward, construction, discounts, correlation | 36:12–42:16 | | Sustaining Edge | Four moats/barriers in secondaries | 42:16–47:25 | | Size/Alignment | Assets under management, alignment issues | 47:27–53:11 | | Skin in the Game | Career-long investment lesson | 61:06–64:23 |
Practical Takeaways
- True ‘alpha’ in private market secondaries comes from hard-earned insights, information advantage, and process—not luck or access alone.
- Alignment (ie, significant GP investment) is paramount in choosing managers or co-invests.
- Look for signal in how managers structure their funds, their personal financial commitment, and their willingness to share economics.
- The secondaries market, once niche and stigmatized, is now an essential and expanding part of sophisticated portfolio management.
- Information is king—and in private markets, information is a function of relationships, process, and internal tools.
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