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- [00:00]
A
Now, the private equity fund cast is about to begin. So give it up for your host, devin and jim.
- [00:13]
B
5, 4, 3, 2, 1. Thunderbirds or go. Welcome back to the fun cast. I haven't been on for a while. This is Devin, by the way. I've been on the road and I haven't had anything good to talk about, but I finally do. We're going to cover everything. Secondaries today, continuation vehicles, gp, led, LP led, et cetera, et cetera. This'll be a good lesson for me because I get called about so many secondaries all the time, but I never take the calls. But maybe I should. So after this, you're gonna know maybe whether you should take the call or not as a gp. So with us today and big fans of the firm, we've done lots of work with the Houalan Loki team. We have Samir Shamsi, the head of GP LED secondaries at Houalihan Loki. Welcome, Samir.
- [01:02]
C
Devin. Thank you very much. Excited to be here. I'll clarify one thing so that my partner in crime doesn't get, you know, is. Doesn't get offended. I am the CO head of gp.
- [01:13]
B
Oh, the co head. Yeah. I wrote down CO head I gave you. By the time I wrote it down and said it, I had given you a promotion. And clearly you haven't been checking your email because I get all. I, I clear all Hoolan. Loki Promotions before this is.
- [01:27]
C
Well, well, that is an added. I'm just excited to be here. The promotion obviously an added bonus. Thank you.
- [01:32]
B
Who is the, who is the CO head?
- [01:35]
C
My partner in crime, Michael Pilsen.
- [01:37]
B
Michael Pilsen. All right. Well, Pilsen, great neighborhood in Chicago. So he was named after where the best Mexican food is in town. So let's do this. Samir, I'm sure as a young boy, wherever you grew up, hopefully upstate New York, because that's where all the crates come from. But you can tell everybody that you dreamed about becoming the co head of GP LED secondaries as a grown man.
- [02:04]
C
So tell us, what child doesn't dream about a career like this? Well, I will tell you that this is. No, no one had any idea I would turn out to do something like this. I, I actually grew up in the suburbs of Chicago. Grew up in the western suburbs, grew up in Villa Park. Family later moved to Downers Grove. So big fan of Chicago. Still wear it on my shirt sleeves. Spend as much time as I can in Chicago. Despite having lived in New York for about 30 years. I, I actually, my, you know, my Parents dream was for me to go to medical school. So spent the early part of my, my, my educational career focused on took my pre med requirements in college and, and did all of that before eventually realizing I couldn't stand the sight of blood but did love. I loved math and having a moved to New York to attend Columbia as an undergrad. Being around Wall street getting excited about the world of financial services, I'm not surprised that I've found myself in this world though even as recently as 15 years ago I did not know what secondaries was.
- [03:20]
B
Yeah, you and me both. All right, so the steps from Columbia to secondaries, was it like traditional investment banking or were you in the alternatives side at all? What was the path for again? I was giving a talk recently and I was telling everybody there's never been a better time to be in private equity. There are so many different pockets of money, there's so many different flavors of this all. Just like the public markets have splintered into so many different pockets. This is a great time to be in it. And so how do you find yourself into secondaries? Just right place at the right time or is there really a career? Well, 15 years ago there probably wasn't a career path. It's probably now more than it used to be.
- [04:01]
C
That's right. Well look, why don't I start there? I mean there really wasn't much of a career path 15 years ago. A lot of the original, a lot of the folks that I met back then, a lot of people who had been practicing secondaries for a while had really kind of had roundabout journeys to find themselves in this world. And today the world is very different today. It is shocking to me and it's actually quite exciting. I'm getting email, I'm getting inbounds from, from students in college wanting to learn about the secondaries industry. And so that just shows the institutionalization of this world. But really, you know, I was a, I think of myself as, I was a reformed financial sponsors banker, all right, who found his way into the secondary market. I started my career as a management consultant, did that for five years out of college, then got my MBA, graduated in 2006 at a time when the pri, you know, during the LBO boom. So the natural thing to do was to find a way to get into that world. And I joined the financial sponsors group at Credit Suisse where, you know, learned about LBOs, spent a lot of time and built a lot of LBO models in a very short period of time, became excited about the private equity world and eventually, after a couple of stops, found my way to ubs, where I joined the secondary advisory team, which was in the early days of this world. I remember prepping for those interviews. And this was a, this was a $9 billion a year market back in 2009, 2010, and it's obviously grown 15, 16 fold since then.
- [05:41]
B
Amazing. So people on the funcast know this about me a little bit. You don't know this about me yet. The only thing I know about Credit Suisse in New York is that's where eleven Madison park was, in that building. Is that right?
- [05:55]
C
Eleven Madison Park. And you know, some people will remember there was this great Indian restaurant called Tabla. Yeah, that was, that was in the same building, which was, you know, obviously didn't get the same attention as, as Levin Madison park, but fantastic spot.
- [06:12]
B
Much more affordable too.
- [06:14]
C
Much more affordable. I also remember, you know, it was, it was where the original shake shack was.
- [06:21]
B
That's true. Yeah.
- [06:23]
C
Night. Nice to kind of sneak out in the middle of the day and cross the street and get, get some burgers back when that was, that was.
- [06:30]
B
You can look out the window and see how long the line was and be like, no, we got to go, we got to go. Now's the time. All right, so let's talk about the, the history of secondaries, right? So, you know, eight or $9 billion business, you know, two, less than two decades ago, and now 15F. Give us like the history lesson of secondaries. Yeah, because I remember was like Landmark or something would call you every once in a while back in the day.
- [06:55]
C
That's right. Yeah. No, that's. That's exactly. There was a small universe of secondary investors that started investing. I would say the earliest transactions were probably completed in the late 80s, early 90s, as you had, you know, corporate venture capital, corporate venture groups who were looking for liquidity and over time and.
- [07:15]
B
Somebody would go do. It'd be like a matchmaking service. Like, hey, so and so needs liquidity. They want to get out. I'll go talk first. Call the GP. GP says, hey, LPs, anybody want to buy this? You go talk to them. And then maybe the. No LP wants to buy it. So you go, go find some third party. There needs to be some matchmaking service, but it seems to be pretty boutique y and pretty kind of like episodic and catch as catch can.
- [07:37]
C
And that's. I mean, I think matchmaking is the right way to put it. And that is what the business was, you know, until, you know, you start to have more sophisticated People playing in this market, institutionalizing it. And I like to think my, you know, you know, when I, when I joined the team back in 2010 or got into this market, the thought was let's, you know, we were a team of people with, with banking experience who wanted to bring an investment banking approach, you know, to this world of, of, of LP secondaries. Because at the time, majority of what we did was help LPs, endowments, pension plans, foundations, family offices generate liquidity for illiquid investments. And that's what we did. And it ranged from kind of very light touch matchmaking to very hands on M and A style processes. And we prided ourselves in running those M and A style processes for large pension plans.
- [08:33]
B
Well, and Credit Suisse and UBS with both like phenomenal placement agent businesses, like two of the biggest, two of the best. So I imagine those were great places to learn and launch from as well.
- [08:46]
C
And that's right, if you, if you, if you think about it, I mean these were, these were, you know, these were teams that were well positioned to provide family office, these institutional investors with whom they had a regular dial dialogue with another piece of advice. So we're helping you get into funds. Oh by the way, you know, are you looking for liquidity? I mean how is now let's talk about your allocation. Are you interested in rebalancing your portfolio? So it was a very complimentary offering. And you know, and that's how, that's how this business started.
- [09:19]
B
Okay. And then as you think about how it evolved, like were there kind of epics that kind of, you know, there was the matchmaking service in the 80s, then it maybe turns more investment banker. Like we're covering it, we're researching it, we have a database like how did it evolve over time and where are we today?
- [09:38]
C
There were a few, as I think about, there are a few very interesting catalysts for this business. It was a niche business. And then following the financial crisis, banks, all financial institutions really started generating liquidity for their positions. One, they wanted liquidity. Two, there was regulatory pressure for banks to, you know, wind down their private equity portfolios. That ended up being a huge tailwind for this business as every single the.
- [10:12]
B
Things that were sitting on their balance sheet, not their LP stakes, but their actual private equity assets.
- [10:19]
C
Both actually there was an early wave of selling of LP interests. Okay, Ross. And you know, you, every major bank that had large LP portfolios eventually sold off these portfolios. Our team advised on a lot of those. And that really was, you know, that was the Real catalyst for the business in the years immediately following the financial crisis. Following that, you know, and as that continued, you started to see the advent of where we saw the advent of GP LEDs. For the longest time, this was really seen as primarily a solution for limited partners in private equity funds. We had some GPs who were supportive of the transactions because they thought it'd be nice to help their LPs who wanted liquidity.
- [11:06]
B
Yeah, you get a call from an endowment, hey, we're a bit over our skis. We're rebalancing the portfolio we need to sell. And then obviously we have in our agreements like, well, hey, we need to be informed. And you can't just go transfer this to anybody. We got to talk about this. So you kind of GP inserts themselves into that. That would be like, I have an LP in distress, I want to, I want to help out. And now it's become more of like, yeah, it's just pretty system standard.
- [11:33]
C
And it was, and it was really, that's, you know, it was really seen as a way, and, and you know, and we would, we would seek gps or encourage them to cooperate because that's, you know, you want to be a cooperative GP, you want to help your LPs. And then, you know, over time, you know, GPS realized it was actually to their advantage to be cooperative. It was a great way. The secondary fund, the secondary investor universe had also become institutionalized. You had investors raising significant amounts of capital. Many of these, many of these investors could in turn be great long term partners for these gps. And so now you had a way of bringing in new partners who could actually be accretive over the long run. So they embraced kind of that, that, that lp, LP secondaries as a way to help themselves. But that was just the tip of the iceberg from a GPS perspective because eventually they realized, starting with, again, the, you know, the, the financial crisis. Gps found that they had assets in portfolios that weren't ready to sell. And realize that you can use secondary technology to hold on to assets over an extended period of time. Initially, it was a way to hold on to assets again that weren't ready to sell or that needed some additional capital in time. Sponsors realized that this was a great way to hold on to high quality assets that they didn't want to sell, or they thought there was, you know, some real upside from holding onto these assets over an extended period of time, or there was these, you know, really strong, they had a really great relationship with a, with a stellar management team and wanted to continue that partnership. So there's a number of reasons why, you know, sponsors started leaning into GP led secondaries as a way to again really hold on to, to trophy assets.
- [13:39]
B
So, you know, there definitely was back in the day a stigma around an LP selling an interest because it was viewed as kind of distress or they need to sell it for some reason. My sense is there's been a similar early days of the GP LED secondary of like, hey, I'm gonna, I'm gonna basically sell this asset to myself. Some LPs raising an eyebrow of like, hey, wait a second, your job is to go buy a company, drive value and sell it. Get me liquidity. So like, what's the bulk dollars we're talking about now in the secondary world? And how has your relationship with clients changed over the years as this has become more and more a standard piece of technology in the private equity industry?
- [14:24]
C
Well, I'll talk about kind of both the size and kind of what this has become. You know, again, this is now, you know what's interesting, and I remember the early days, this is probably 2014, 2015. I remember calling a GP because an LP had suggested that they might be in the need, might be in need of a potential solution, called to call the managing partner of a firm. Introduced myself and said, look, we understand that your portfolio might benefit from a secondary solution. And I'm here. And they hung up on me. And it was before, before, before this gentleman hung up on me actually said, well look, we, I don't know where you heard this from, we don't need any, any help. We have no problems in our portfolio. And it's interesting to see how, how much things have changed over the last decade and we've gone from, you know, being shunned. I mean, I mean secondaries was, I mean this was a four letter word a decade ago. And now, you know, sponsors are issuing press releases to, to trumpet successful continuation fund processes. So markets come a long way and with that growing acceptance and knowledge that this is a portfolio management tool, look, we think this could be a solution or a path of liquidity for 10 to 20% of all private equity owned businesses. And so with that, this has become an ordinary, ordinary course transaction. Today we estimate there's roughly $200 billion of dedicated dry powder allocated for secondary transactions. What that doesn't capture is new capital being raised and all the opportunistic capital that's out there that can also participate in transactions. So again, the market has grown 15 fold in the last 15 years. But I think what's Even more interesting is the number of use cases for this technology. And the growing acceptance of GP LED secondaries is just, you know, another tool in the toolkit of sponsors.
- [16:37]
B
All right, so our listener isn't very bright and we know this because he's a good friend of mine. So let's like break down the lingo a little bit. So I want to like have you tell me what's an LP secondary? What LED secondary? What's a GP LED secondary? What's a continuation vehicle? What's an A NAV loan and how does that fit into it? So let's start with LP led. We alluded to this earlier, but like LP LED secondary quickly is what.
- [17:05]
C
LP LED secondary, very simply put, is a limited partner in a private equity fund selling its interest to another limited partner. So, you know, for example, you name your state pension plan seeking liquidity selling their LP interests to a private to a secondary fund as a way to generate liquidity. Ordinary course transaction. This is probably the oldest type of and simplest type of secondary.
- [17:32]
B
And this back in the day would have been likely an LP in a fund to an LP in the same fund. Match made by the gp.
- [17:42]
C
That's correct.
- [17:43]
B
And now is grown to say, let's say large state pension fund. I've got either all of my interests across this basket of gps, maybe a dozen, two dozen gps, selling all of it to a dedicated secondary fund. It could be as broad as that, from as narrow as that a while ago and still even I mean we just helped one LPA sell an interest to another lp. So that stuff's still happening. But there's even bigger things where an LP may sell entire strips of vintages and things.
- [18:21]
C
Correct. LPs will sell entire portfolios. And it's the, it's the professionalization of this strategy institution in the market that allows that to happen. I actually think I once worked on a transaction that at the time was probably the most funds ever traded in a single transaction, which has since been surpassed 346 funds.
- [18:45]
B
Amazing.
- [18:46]
C
It was a financial institution winding down a portfolio of about $1.4 billion across just a very, very large number of interests.
- [18:56]
B
So the diligence for that is like, is this priced right? What do the underlying assets look like? What's the duration I'm in this for and what could I generate in this stub period? Right, because you're not coming in in year one and get out in year may be coming in year six, seven or eight or nine, 10, 13.
- [19:13]
C
Right.
- [19:13]
B
And it's like, okay, it's all about pricing and where you're coming in and then some understanding of, again, if it's, if it's just one fund and with some assets relatively easy to understand that portfolio. If it's 300 funds across, you know, 1.4 billion, you're just kind of getting a flavor for like, where do I think this could come out?
- [19:31]
C
That's spot on. Right. So, so when you mean you're buying, you know, it's, it's. I mean, this is 346 funds just hyper diversified. Right. You've got, you've got several hundred, maybe thousands of companies with just like really de minimis exposure to any one asset. And so you're buying an index of private equity across managers, vintages and strategies.
- [19:55]
B
Yep. So the conversation really is around as people are thinking about this. It's around, what price, what's the discount I'm getting off the nav. Right.
- [20:04]
C
And we can.
- [20:04]
B
Yeah, and there are times where nobody was giving discounts. Maybe there are times that, you know, they would give discounts. So that's your job, is to go. To go match those up. All right, let's talk about a GP LED secondary.
- [20:16]
C
So a GP LED secondary is a secondary process initiated by the GP. And so these transactions kick out some.
- [20:25]
B
LPs they don't like, you know, that.
- [20:28]
C
Is, that is not something, you know, they might be more inclined to help certain LPs exit. But no, this is not that at all. There's really, at the end of the day, as you think about these relationships, it's got to make sense for every party. So the GP does have to be thoughtful. It's got to make sense for every stakeholder. There's a couple of types of GP LED secondaries. The one that gets the most press is the continuation fund. This is when a GP moves an asset from one fund into another fund that it manages so that it can hold on to this asset or maybe a collection of assets for an extended period of time.
- [21:12]
B
So let's call it like. And it could be a single asset vehicle. So a continuation fund, they're not selling it from fund two to fund three. They're selling it from fund two to a single asset vehicle.
- [21:22]
C
Correct? Right, correct. And maybe, you know, the way I like to think of it, it's selling assets from Fund 2 to Fund 2A.
- [21:29]
B
Yep.
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C
Okay. You set up a new fund and you move one or more assets from fund two into this vehicle. What's nice is that it creates an.
- [21:37]
B
Exit for Fund 2 or the LPs of Fund 2.
- [21:42]
C
So it creates an exit for the fund itself. LPs have the option to sell at the price determined by the process or roll into the continuation fund and retain exposure to the asset for several more years. So you're creating that nice optionality for your LPs. You're creating an exit for the legacy fund. You, the sponsor, now have several more years. You have a new term to continue managing this asset with the existing management team of the company. So oftentimes that's a big driver of these transactions. It's a management team and a sponsor wanting to continue the relationship. I often call it a, it's like a renewal of your vows is. It's a. You're basically doubling down on this partnership for four or five more years.
- [22:30]
B
Yeah. Other than it's way easier to get divorced than to get out of a fund. Way easier. So let's, so let's take this hypothetical company, let's just do the single asset.
- [22:42]
C
Yeah.
- [22:42]
B
And we'll go to the multiasset next as GP led. So I'm theoretically own a company. We have $25 million in the team has done well that hundred. We price it and we all agree that 25 is now worth a hundred.
- [22:58]
C
Sure.
- [22:59]
B
Right. So I could take this to market and sell it for, you know, say I could sell it for somewhere between 80 and 120.
- [23:07]
C
Yeah.
- [23:07]
B
I don't know how the process is going to go. I sell it to another private equity fund. We feel confident that 100 is, you know, the median of where it could sell. And the, and so as the GP do I call up my LPs and say can I do this or I'm going to do this or like how does that happen? So like we decided we're going to do a fund two way, single asset vehicle. 100 million is the price. It's a 4x for the fund. And then, so what's the conversation with the LPs at that point?
- [23:36]
C
So I think step one is you talk to your LPs and you tell them, look, we have this great business. We obviously this has been a successful investment for us over the last, let's say four or five years based on our marks. Right. Because that's the one thing that, you know, based on our marks, you know, you're sitting at, your investment is sitting at a 4x. Right. So we, we, you know, we could, we could sell the business. We actually really believe in it and have conviction that, you know, we've made four times our money, we could probably make another three to four times our money over the next several years. So we'd like to create an opportunity for us and for you to remain invested in this investment for several more years. So we're going to run a secondary process. We'll give you a liquidity option. You have the option to sell or roll into the continuation fund. And I think that type of conversation needs to take place.
- [24:36]
B
So a 10% LP in the fund can get $10 million by selling out. They could roll 10 million into Fund 2A.
- [24:44]
C
That's right.
- [24:44]
B
Or they could do half and half or some version of that. Is that open to them? Are they kind of. Are you all in? Are you all out? Is it like all in or all out? Or is it flavors?
- [24:52]
C
It is, it is, there's, there's several flavors of the roll option. You know, I think, I think we've, you know, we see the 5050 option quite frequently. It's a nice option to offer to your LPs, but there's no, you know, you know, depending on the circumstances, we've seen GPS offer a variety of options.
- [25:16]
B
Okay, so let's say they do the 50, 50 schmuck insurance, right?
- [25:20]
C
Yep.
- [25:20]
B
So we have 50 million of interest from existing LPs of Fund 2 that go into Fund 2A. That means I need to raise, I need to hire you to go find 50 more.
- [25:29]
C
That's right.
- [25:30]
B
And hey, Samir, I want to do some add on acquisitions with this company. So I need, you know, 25 million of M and A opportunity. So I actually need to raise 75. Is that fair?
- [25:42]
C
You've, you've nailed it. That's, that's exactly how, that's exactly how the process works. I'll give you a little color on the qu. The numbers and what we've been seeing lately over the last two to three years in particular, the sell rate on, on, on, on CVS has been, has, has actually been closer to 90%. Okay. Right. And so, so we find that the vast majority of LPs when getting a fair price for an asset that's for an investment that's performed well, will actually elect to take liquidity. And so in this instance, we'd probably end up raising, you know, over $100 million between, you know, the expected selling volume among LPs and the unfunded capital for, for M and A and growth. But, but, but I think you've, you, you've kind of, you've nailed the process.
- [26:37]
B
So it's not necessarily just getting liquidity. It may also be, hey, this fund is tapped out to support this asset as it gets bigger and bigger. I could sell it to the next biggest private equity fund and they could go benefit from that. Or we should keep it because we, you know, feel like we're on a roll. We know this business well, we know the market well, we trust the management team. So this is a GP LED is really perfectly for a very good asset that you want to hang on for a long longer, that may be at odds with DPI in the fund, it may be at odds with the fund life, it may be at odds with the liquidity left in the fund to continue to support this asset. So why sell your winner when you can give your LPs a great return and still benefit from it? Okay, so what happens if, I think if you generate carry off of this sale, the GP crystallizes the carry, right? That's what we're calling it. Crystallizes the carry.
- [27:31]
C
Crystallize is the right word. Yeah.
- [27:32]
B
So that means like, okay, so say we sell this business and it generates 5 million a carry for the GP. The GP is asked to roll that into fund 2A. Don't put that in your pocket because the new 100 million plus that's coming into this vehicle needs to know that you're committed. So you need to put the hard dollars in there. Hey, maybe the junior guys can sell out and you can give your, you know, VPs and principals their carry, but the lead guys and women in the deal probably need to stick in. Is that right?
- [28:03]
C
Your, your, your understanding is spot on. Right. The starting point for these discussions, especially if you are kind of new investors coming into the deal, is the best way to manufacture alignment is by making sure the sponsor has skin in the game and isn't taking any chips off the table. So the starting point is full role of all economics. And you're right, there are situations where exceptions can be made for individuals that have left the firm or maybe for some junior folks. But really the key is to use kind of the role of economics to create alignment between the new investors and the sponsors. So I think you've, you've, you've, you've nailed it.
- [28:45]
B
And then what are the General Economics on a. On fund 2A, for the GPUs. Continue to manage it. Yeah, we've rolled our 5 million of carry that we crystallized from this transaction in there. We get it. We believe in this business or we wouldn't have wanted to keep owning it. What now on that? Let's say we raised 125 million for this vehicle. What is, is then the GP still managing it? What are the economics around that?
- [29:11]
C
So, so the GP and I think this, this is, you know, this is one of the, over the last, there was a time maybe about a decade ago when you know, each continuation fund had its own unique economic structure. I think over time the market has come back with, with a more standard structure. Obviously there's ways to customize this, customize this. But typically receive a management fee of roughly 1%, 1% of net invested capital. So in our example, if, if there's 25 million of unfunded cap, unfunded capital commitments, the GP doesn't get paid until that capital has been called and invested. And if there's cost that's taken out or returned, you know, then that gets deducted from this amount. But you're getting a 1% fee on net invested capital and typically a tiered carry structure. So most common one is 10% over 8, 15 over 15 and 20 over 20.
- [30:16]
B
So that the IRR.
- [30:18]
C
IRR. That's right. And so if you're generating kind of a 20% net IRR then as a sponsor you can get a full 20% carry on a bigger number. On a bigger number.
- [30:33]
B
Did you put 25 in it originally? Now you've got 125 in this fund and you can generate, if you are successful, a full carry on $125 million.
- [30:43]
C
You know, not to mention succeeds, not, not to mention that, you know, you've rolled all of your crystallized carry into the deal so you're getting next 3x or 4x on, on all of that crystallized carry. So, so financially it can be quite attractive. I, I think one of the, you know, and that's why, you know, the new investors in the continuation fund recognizes that there's really good alignment between them and, and the sponsor if the sponsor doesn't take any chips off the table. You know, I think the I, I, you know, what we do find is, you know, and there are even times when we've seen super carry on deals where based on the projected return profile of the transaction, sponsors have been able to get carry of over 20% for delivering a very specific, for delivering a certain return. So it can actually be quite interesting and compelling economically for sponsors.
- [31:49]
B
Right. So I want to get to ma how management in this, the management of the company gets treated in this in a second but so do the LPs who sold out the 90% who generally sell it, look back four or five years later and say like hey man, you sold this for 100 and then, you know, five years later you sold it for 300. Are they just like, hey, we understand the deal. I could see that as a. All right, let's walk through the cons. One is, hey, you're selling a good asset to yourself when you could just keep it in the fund. That's one, two. It's a fee grab, right? You're maybe you're post five of five years on the, on the fund, the feast, the fee stream's going down, so you sell assets to yourself. You kind of reset the fee clock and some other things. What other would be criticisms? And you can say whether they're, they're valid criticisms or not. And I know that this is Getting more standard LPs are less suspicious of these things. And there's a market, right, there has to be a buyer of these and a seller of these. So it's not like anybody's being coerced into doing it. So what would be the negatives or the concerns from the LP side about continuation vehicle?
- [32:56]
C
Well, I'll tell you what, I'll tell you what's changed and I'll tell you that there are both a set of best practices that have emerged around these transactions as well as. Look, I think, I think LPACs and LPs over time have actually gotten, you know, as they've gained experience, I think they've been good thought partners for GPS on what makes sense. And if you are, you know, a, you know, if a GP is being responsible, then, you know, I think as we discussed is engaging their LPAC early on these transactions. So I'll give you an example. You know, you, you raised a very good point and that is, you know, how do you, you know, how do you. LPs may ask, have you. Should we leave the asset in the fund for an extended period of time? And the reality is oftentimes that's challenging because the fund itself is mature.
- [33:57]
B
Let's say this, you did this deal in year five of the fund.
- [34:00]
C
That's right.
- [34:01]
B
And now it's year ten of the fund. And you're like, okay, we could do this. I could get you liquidity or I could keep it in for the two more extension. You know, let's go to. I got one, two, one year extensions typically. Do you want to take this to year 12 or would you rather cash it out now?
- [34:17]
C
And, and I think that's, and that's a. So if I think about the rationale from the gps perspective that LPs have been supportive of one is no it's a fund that's a little longer in its, in its life. 2 and we've seen a lot of this in recent years, just given the current M and A, the M and a market. LPs are very supportive of generating liquidity at a fair price. And I think this is a discussion where if a sponsor has an asset that's performed Well, I think LPs have been very supportive. You know, it's only, you know, and so a lot of these deals are, you know, investments that have generated a, you know, two and a half x, a 3x greater than a 3x over the initial investment period. So when you're creating an exit for an asset, for an investment that's performed Well, I think LPs are happy. It does become a little more contentious if you're going early and you think there's just a lot of upside that the, that the fund is leaving on the table.
- [35:26]
B
I mean, we've seen like three, three years into a fund already a single asset getting carved out. I mean.
- [35:34]
C
Well, I'd make the case. I'd make the case. And clearly, if the ELPAC is being supportive of an exit after three years, there's got to be some rationale, right? So maybe, maybe the investments of 4x in three years. Well, if the investments of 4x in three years, maybe the prudent thing to do is to lock in that gain for LPs, maybe. And we've seen this as well. You have, maybe the investment has performed so well, it's generated an outlier return. So we've seen this with investments that are 4x's or 5x's, you're past the concentration limit. You might only be three years into the fund's life, but you actually can't deploy additional capital into the deal because the investment's now more than 20% on the fund.
- [36:21]
B
Yeah, understood. And we all know that having a banger early in the fund, stopping the clock on a lot of that pref. Like, there's a lot of value to that. So no, any continuation vehicle that happens, the LPAC has voted for it. The LPs have. Nobody's stopped it from happening. So the fact that it happened meant everybody was okay with it. But I do, you do see, like an early CV and you scratch your head a little bit. Like, why wouldn't they hang on to that in the fun.
- [36:47]
C
I do think, I do think you're right. Maybe the way I think of it, it's often the way we think about deals, you know, as, as you Know, as, as part of our brainstorming with sponsors and trying to be, you know, good thought partners is let's, let's make sure there's a clear rationale and your LPs will be supportive. And ultimately there are times when it does make sense to wait or it makes sense to approach the CV in a different manner than what the GP originally had in mind. But ultimately, you know, look, the most important thing for a GP to do is make sure they give their LPs good options.
- [37:25]
B
Yeah. Okay, let's talk about management. The management of this company. We put 25 in, now it's worth 100. We want to hang onto it for longer. How's management getting treated in that situation?
- [37:37]
C
Yeah, well, look, first of all, management's a very important stakeholder. This doesn't work without management.
- [37:43]
B
Hey, come on, this is a private equity podcast. We don't need to pretend that management's important. Come on, come on, come on.
- [37:48]
C
No, it is.
- [37:49]
B
We all know that. We all know that. You know, it's the gps that make all the value happen.
- [37:53]
C
Manage. Management is management management.
- [37:56]
B
No, but is this treated like an exit for them or are they like, oh, great, you got all this liquidity, your LPs did, and now I'm just stuck here for another five years running in this company for you.
- [38:05]
C
So, so I'll, I'll walk you through the balance, right, because again, there, there's two things, and I'll tell you how important man management is. So important that the new LPs, the new investors in the continuation fund, want to make sure management has skin in the game. So management is often allowed to take some chips off the table. Right? What typically happens is this. Management's been involved for several years. They've achieved the milestones that the sponsor initially laid out when they, you know, kind of established this partnership. So, you know, I think, you know, what we see frequently is kind of you create a new, a new incentive plan for the go forward period, they vest in the old one and they're allowed to take some liquidity. It obviously.
- [38:52]
B
Does this trigger a change of control, like in a management document? Is it like because you're selling it from one fund, Parker Gail, you know, 20 to Parker Gale, 20A. Right, like, you know, it. Is that a change of control per, like a management, your equity for most.
- [39:11]
C
Of these agreements, it doesn't seem like they are. It's, it's officially a change of control. It's seen as the right thing to do to, to pay out management and to, and to Create a new agreement for incentive plan for the go forward period.
- [39:29]
B
100% agree. It should be treated as a change of in my opinion. I have heard in some cases where, where funds GPs have tried to, to convince their or tell their management no, this isn't a change of control. So like this doesn't trigger any liquidity for you guys. That does not go down very well. Based on my private conversations with some management teams who've asked me like hey, I'm getting treated like this, what do you think? 100% they should be. It should be like a change of control. And my expectation is you roll 50% of your take or whatever or it could be raza roll 100 if you really believe in it. But like 50 would be my in my head like that seems about right. And I'm going to re up you with a new pool and then we're going to like set the clock again. And if I was an LP in this new 2A fund we've talked about 100% I would want to talk to management and say like let me show me your proceeds here and let me see if this is worth your while.
- [40:23]
C
And that is why management buy in is so important to this because ultimately no LP is going to commit to a continuation fund if they don't think management is happy, aligned and incentivized. And so, and, and, and, and that is so management often ends up being extremely critical to this. And what we find is management will get some liquidity. It's rarely 50%. I, I think, I think it's more, it's usually more like you know, they, they, they get liquidity. They, they roll, they roll greater than 50%, probably roll closer to 2/3 to 70% of their, of their stake. And yes there are situations where they roll 100%. There's a, you know we worked on a deal recently where management actually took their bonus, took their most recent bonus instead of cash in company equity because that's how, that's how excited they were about the business. So what, you know what you're looking for is you want to treat management fairly. You want to make sure they've got the right incentives. You want to make sure, you know, because, because they haven't, because many of them have deferred a big payday for several years that they get some liquidity today. But secondary investors want to make sure management has skin in the game.
- [41:46]
B
Totally. All right, let's talk about real quick because I want to this, we'll get into the speed round like about like multi Asset continuation vehicles. Asking for a friend, can you hide some stinkers in there? You throw like a banger in there and a couple stinkers like, you know, what about like the, what you've seen like four, five, six, seven companies in a, in a, in one vehicle and can it be across like a old fund and the current fund and this like you can throw anything you want in there as long as somebody evaluates it, prices it and well agrees.
- [42:16]
C
I'll start. Well, I mean, I'll start with your second question. Right. Which is, which is, which is if you've got a multi asset fund, there is, you know, doesn't have to be limited to one fund vehicle. So that's, you know, obviously we've all worked on deals or you know, look, there's some sponsors that are in the habit of investing into individual companies across vehicles. So continuation funds have long been done across vehicles, whether single asset or multi asset. Look, on a multi asset deal, I will say with a, well, maybe I'll ask you, maybe I'll answer this a different way. For a single asset deal, the vast majority of those deals are trophy assets. They are star assets, very easy to underwrite and they, and they, and, and they, and you know, and then look, and then the pricing can be quite strong. On a multi asset deal, I think it's less about, you know, burying a couple of stinkers into the portfolio because the buyers are sophisticated and it's really more about providing a different kind of solution. So if the solution, if the goal is to wind down an older fund and you're taking the four remaining assets that are in that fund and moving them into a continuation vehicle. Yeah. One or two of them might be better than the others. Right. Or how many?
- [43:38]
B
I may say, like, hey, this isn't a bad asset. Yeah, this isn't a bad asset is just in a sector that's in, you know, under some stress. And in three, if I, if I'm able to hold it for three or four more years, I'm not going to turn it into a banger, but it's going to be way better than it is today. If I was forced to sell it today, it would not be a good outcome. So let's just get it into another vehicle, give it some more time. Management knows what they're doing. They just got operated on, something toast.
- [44:05]
C
You know, and then, and then, and then buyers are underwriting these deals, deals differently as well. Right. The, the, if you, if it's a single asset, right. You're, you think about kind of a Concentrated position, cost of capital is going to be higher for a deal like that than a diversified deal. And so, you know, I think, I think that's, that's important to note as well.
- [44:23]
B
Okay, so if anybody's thinking they can do a single asset continuation vehicle with a turd of an asset, that's not going to happen.
- [44:31]
C
I, you know, it's been done.
- [44:33]
B
I mean there are, you know, everything's been done. Everything's been done. But that's not the, that's not the first, that's not the thing on your list is like, let me go take a bunch of.
- [44:42]
C
I'm not, I'm not, I'm not going out of my way to, I'm not going to sponsors and asking, I mean, I'm asking them about their best assets, not, they're not necessarily the worst assets in their portfolio. But that said, one of the ways this market's changed in recent years is there was a time when every secondary investor did the exact same thing. And now, you know, and now we have specialization. So if you were to, if sponsor were to call me or call us with the last one or two assets in a, in a 12 year old fund, you know, where the assets have gone sideways, they're hairy. There's some story. We actually have investors for that now. And there's investors who are, you know, kind of the, you know, they're the special situations or the opportunistic investors of the secondary world. And look, they're willing to provide sponsors with a solution.
- [45:36]
B
This is why I tell people there's no better time to be in private equity. There's so many flavors of it and you can like own a slice of it if you're creative and smart.
- [45:45]
C
That's right. I mean, look, years ago as a private equity firm, you could, you could buy a company or you could sell a company, maybe you could refinance it. And that was really about it. And you know, so over the last 20 years we've seen so many different ways that those, you know, kind of, let's say, you know, traditional parameters have changed. So there are a lot of, kind of interesting things that private equity firms can now do.
- [46:12]
B
There are only two business models in the words world, Samir, bundling and unbundling. Those are the unbundled. We're in an unbundled world of secondaries in my opinion. And we're in a bundled world of primaries. GPS are getting bigger and bigger with multi assets and secondary guys are getting more and more splintered, in a good way, atomized and they'll eventually, you know, and there's big, obviously multi, multi product secondary firms. But like if, like you said, the distress special sits like, you know, secondary guy, that just does Europe. Like there's a, there's a market for that and that.
- [46:48]
C
And what's exciting about that is more deals can get done. The art of the possible broadens. And you know what? Pricing is getting better. Yeah, because, because, because, because, because you have people, because you have, you have experts or people that specialize in a certain type of deal looking at that deal.
- [47:06]
B
Yeah, See, I told you we could go almost an hour without catching, taking a breath.
- [47:10]
C
This is, this is, yeah, no, I.
- [47:12]
B
I, so let's talk, let's, let's do this. We'll wrap it up. Because you've got, I imagine you're a busy guy these days. So we're recording this for somebody who's listening to this in the future.
- [47:24]
C
During.
- [47:24]
B
All the tariff mess of the early days of the Trump administration and kind of a lot of uncertainty in the market, let's put it that way, uncertainty, volatility, and no clarity on where things are coming out. We were headed into a year 2025 that was going to be record S P earnings. Right. Record profits across public companies and private companies, an IPO market opening up, a fundraising market kind of, you know, thawing out. And that now appears to, at least today as we sit here, you know, in April of 2025, less clear than it was at the beginning of the year and getting more frightening than anybody probably could have imagined the year come from. My sense is that dynamic probably is a net positive for your business of their traditional ways to get liquidity. I probably need to get a little more creative. Yes or no?
- [48:16]
C
I mean, yes. Right. I mean, there's more, more creativity. And we're here to provide solutions. We're, we're getting a lot of inbounds from people that were thinking about launching processes, M and A processes, but now want to make sure that if those processes don't launch or if they reconsider, want to, want to understand the art of the possible with respect to secondaries.
- [48:37]
B
Well, think about this. You're sitting in a business that is, you have uncertainty around how the tariff impact impacts you. You're going to hire a banker and take that to market and take it to a hundred other GPs and strategics to try and buy this. Or you can say like, you know what, we're going to price it fairly for the, for the, we know this business, we know this management team, we've got plans for it. We're going to hold on to it longer because I certainly don't want to take it to market now. I want to generate liquidity for my LPs for all, all the reasons you would want to generate. The LPs would be happy to take liquidity and they don't need to max out the price. Especially now where they'd be like, you know what, I'll take a 2 1/2 x on that and walk away instead of taking it to market and maybe it not transacting distracting management having a bad year and then having to hold on to it for three or four years to hopefully maybe get a two and a half or 3x then let's get some liquidity now. Let the GP take it from here. It's out of the fund. You know, new people come in and can back whatever strategy. Hey, maybe you don't get the best pricing on that, but you don't have a six month competitive process in the market where management's completely distracted. That would be my pitch for, for a secondary.
- [49:47]
C
Now I think, I think you've put it very well. Right. So it is, it is a, you're creating a nice liquidity option in a time of uncertainty. And you know, and, and I think it, it is a, you know, it just show the, the inbound activity has, has, has really blown up in recent weeks.
- [50:06]
B
Yeah. Because you're the gp. If you're the GP looking at this asset to buy it from another gp, you're like, what do what don't I know? What do these guys know? What am I going to miss? Diligence is going to be a mass. Pricing is going to be tough. Lending is going to be tough. When we just, the GP who believes in the asset knows there's going to be a, maybe a tough year or uncertain year. This is a good time to do a secondary and reset the clock for a few years while generating liquidity. Okay. Hey Samir, how do people get in touch with you? How do they find other than looking you up on LinkedIn and things? Yeah. Tell the person listening how they get in touch with you to have a conversation.
- [50:49]
C
Yeah, look, I love to have a conversation, you know, but send me an email. I mean I'm more than happy to, to share that. Devin, Is that something I can do?
- [51:01]
B
Yeah, absolutely.
- [51:02]
C
Podcast. Okay. Very easy to find. It's S shamsi.com S H-A-M S I that is, that's correct. And would love to look, would love to, love to chat with you. And again, the thought here is, you know, how can we help you manage your portfolio and, you know, give you advice on how to engage with your LPs.
- [51:26]
B
Hey, as in a year where everybody's trying to keep as much optionality as possible, why wouldn't they not have a conversation with you and say like, okay, what are my options? All right, I don't like those options versus other things, but at least I know what they are. Or I didn't even know that was an option. Which is like me on secondaries where I'm old school. I've been in the business a long time. I'm like, you buy a business, you try and create value and then you sell a business and it's like, you know what, there's a lot more technology out there that you don't even know about that your LPs may be very interested in and may be highly beneficial, mutually beneficial for everybody involved.
- [52:00]
C
I'll just add, only because I know we're running long here, but we actually get a lot of GPs call us because their LPs are suggesting they run secondary processes now because their LPs have seen other GPS do it. So what's really interesting is there's a whole ecosystem of. It's not just GPS, but it's LPs calling GPS, it's lawyers, it's. And I have just started doing. I can't. We talked earlier about, about management teams. I've now done a series of CV101 conversations with CEOs of private equity backed companies who've heard chatter that their GP might be considering a CV and wants to learn how that works.
- [52:43]
B
All right, well, I'm going to send those people to you because I get a lot of calls from CEOs of like, hey, what does this mean for me? What are the ground rules? How do I negotiate? How do I protect my team? Is this a positive? Is a negative? It seems positive because I don't have to switch sponsors, but I don't know what I don't know. So yeah, CV101 is a good idea. And yeah, yeah, Samir, always great to have the Houlihan team on. We've had Tuck Hardy, your partner in the restructuring team, on. I'd like to get him back on. My sense is his phone's written ringing off the hook the last couple weeks. He may be tough to get. I appreciate you taking time out of the day and fantastic.
- [53:20]
C
Thank you very much. I really appreciate it. Thank you so much. All right, take care.
- [53:26]
A
From the heart of Chicago to all over the globe. Couple private equity geniuses. They share what they know. They love to mess with technology. Where the future is sink or swim. It's a private equity fund cast with Devin and Jim. Technology issues, middle market, PE backed companies. They bicker with each other and they don't take them themselves too seriously. It's not venture capital. It's private equity. It's the private equity fund cast. Pour yourself a drink and have a seat. It's the private equity fund Cast that equity is private. If pe excites you, let it show and do not hide it. Devin and Jim.