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- [00:01]
A
The secondaries market sits at a crossroads. Never before have LPs been presented with such an array of different liquidity offerings to back There are specialized secondaries funds focusing on healthcare, on impact investing, on real assets in Asia, or on acquiring direct minority equity stakes in companies in India. There are funds focusing on writing large checks to multi billion dollar single asset continuation funds. And there are funds focusing on making late primary commitments to buyout funds that are still in fundraising mode. In short, if you're an LP looking to back a secondaries fund, you're spoilt for choice. I'm Adam Ley, a senior editor at PEI Group, the parent company of Secondaries Investor. In this special episode sponsored by Evercore, Davis Polk and Dawson Partners, we sit down with advisor Nigel Dorn, legal expert Leo Landa and investment veteran Jan Robard. We discuss why the performance of continuation funds is the key to further growth and the branching out of this part of the market, and why the market is undergoing the fastest pace of innovation it has ever seen seen. So how specialized can the secondaries market get? Listen through to find out. Our guests began by giving a bit of their background in the industry and how specialization has evolved since they began.
- [01:21]
B
Nigel Dawn, Global Head of Private Capital Advisory at Evercore and I've been in this role for the last 11 years, been an advisor in the secondary market now for 21 years, if you can believe that. You know, we're a global team. Chicago, New York, London and Singapore are about 130 in the team now. In terms of specialization, I think we've gone from 20 years ago, even 10 years ago when there was no specialization, I would say at all, to five years ago when there was a difference between GP and lp, where we are today, where there's significant specialization by asset class and by asset and by deal type. So even though I think we're in the early innings of specialization, there's certainly been a meaningful evolution over the last few years.
- [02:08]
C
Hi everyone, I'm Leor Land. I'm the head of the funds and secondaries practice at Davis Polk. I've been practicing at Davis Polk for over 26 years and I've been working in secondaries for about 18 years. We were definitely early into the market as far as specialization. I sort of agree with Nigel. I guess the only thing I'd add is this is the natural maturation and evolution of the market. You know, the market if you go back 18, 19 years ago, was pretty fragmented, very inefficient. It was basically buyers picking off stock sellers that needed liquidity and what we've seen as more capital and more talent has flooded the market over the last 10 years is we've seen a natural evolution and actual maturation. Things have evolved to be more sophisticated and more specialized. I don't see that slowing down anytime soon.
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D
Yep.
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E
Yeah.
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D
So, Yan Robard, Managing Partner at Dawson We're a global firm focused on providing structured liquidity solutions for the private equity market. We were established in 2015 after I spent about 15 years at the Canada Pension Plan Investment Board. And today we are 200 people, over 20 billion of assets under management in Toronto, London and soon to be New York. So very excited about that. We're celebrating our decade of Dawson this year. It is a special year for us. And look, I think that that's the framework for me is if I think back to when we started Dawson, back in 2015, it was really a market that was focused on LP secondaries and the GP LEDs were just starting. And then in the last decade you've seen such a huge evolution and innovation in this market from just LP secondaries and the start of GP LEDs. GPLed is really kind of taking off, but also having infrastructure secondaries, private credit secondaries, real estate secondaries, nav lending, preferred equity. I'd say the lines are blurring with GP stakes as well. If you think about all of that innovation in just a decade, it is pretty incredible how much this market has grown, matured, specialized and each one of those sub strategies itself is about to go through a huge growth phase. You think about positioning the secondary for immense growth going forward. Just to put this in perspective, when Dawson started the secondary market was 40 billion. Today we're 160 billion. Last year that could droop in just one short decade. And I think much of that led through innovation and specialization and maturation.
- [04:27]
F
Can I ask maybe a slightly controversial question then to Nigel and to Leo? So yeah, and you mentioned all these different types of proliferations of strategies, nav lending, GP stakes, all those types of things. Nigel and Leo, do you fundamentally agree that those types of sub strategies should be considered as part of the secondaries market?
- [04:45]
B
I think my view it is in that this market I think Jan referred to, it started as essentially a one size fits all market and it was at a point where trading an LP position was a big deal and was controversial. So we've moved from that to a level of sophistication where the cost of capital now matches a secondary opportunity. So, for example, investors at one point did not want to sell debt portfolios because the capital available was an equity cost of capital. So what that meant if there was a portfolio of LP interest, there was debt interest, they went for a big discount because the investor was solving for a debt cost of capital. Where we are today, of course, is there's an appropriate cost of capital to purchase debt on the secondary market, be it LP positions, be it direct positions. So I think it is a natural part of any market that the cost of capital moves over time to be appropriate for the opportunity. And I think, like I said, I think we're in the very early innings of that in a sense that we're at debt. But then you can break that down if you like, if you want to venture debt, senior debt, mezzanine debt. So in a sense there's a lot of funds focused on debt secondaries. We haven't necessarily got to the next iteration of the type debt secondaries, but it gives you a sense of how far we've come.
- [06:07]
C
Yeah, I think it's. I mean, I totally agree with that, Nigel. I think part of it is it's a vocabulary issue. This has evolved from what was really secondary trading. So we call it the secondaries market. It's really just sort of liquidity solutions, right? It's just ways to provide liquidity. As the cost of capital has adjusted, it's opened up more opportunities. So when you look at nav lending, you look at GP stakes, it's really all the same problem that we are solving, just showing up in different forms. I think. Yeah, we call it secondary, but really we're just solving the same problem across different stakeholders. Started with LPs, then GP started to step in and now the funds are taking advantage. And this is just sort of again, natural evolution and the sophistication of the market.
- [06:48]
D
And I think in all of this, what's really interesting in the secondary market is what happened in the primary market, probably in the late 90s, early 2000, you would think of the primary buyout as just one asset class and you would benchmark all of buyout, whether it was mez or venture or large buyout or middle market buyout or mega, in the same way. And you do that today in the secondary market. The next step of the maturation of this is as the appropriate cost of capital comes to these sub strategies, whether it's private credit secondaries or whether it's single assets with have a different risk return, no better, no worse, just different. Then you are able to start benchmarking those sub strategies in a very different way. So it won't be long from now where at the place of just benchmarking secondaries as an asset class as a whole, you're going to be benchmarking pref equity strategies, LP secondaries, levered LP secondaries, multi asset continuation funds, single asset continuation funds in its own sub asset strategy. And that's what's really going to cause the capitalization, the maturation of this industry is that once we better understand the risk return of all these sub strategies then can allocate appropriate capital towards those sub strategies.
- [07:59]
C
Yeah, I think we're also seeing the pace of innovation. The pace of specialization is probably faster in this market than anything. Listen, I've been practicing almost 30 years and this is the fastest pace of innovation I've seen in any market anywhere. And so we're calling it specialization. But I think all we're seeing is a rapid acceleration in the maturation of this market and we're going to see people pricing all these different sub strategies that Jan just went through. We're going to see people pricing differently. We're going to see people finding niche opportunities in those, raising money around those. There's a lot of innovation, a lot of room, kind of green field room for innovation here. And we're just seeing that happening at a very, very quick pace.
- [08:32]
F
How niche do you think we can get though? I mean Nigel, you mentioned the types of debt are different. Are you saying that maybe we might see a kind of junior lending debt focused secondaries fund at some point in the future? Is it going to get that specialized?
- [08:47]
B
I tend to think it will. And the reason I think it will is that if you think the secondary market in private equity is perhaps 2% of the embedded AUM, there's many markets where 2% wouldn't count as a secondary market. So you know, as this market gets bigger and as it gets more liquid, then I see further specialization. The example I think you're likely to see is if you take say GP LED transactions and then you break that down into multi asset deals and single asset deals. So you have single company funds being created for continuation vehicles. The next iteration is I think then you'll have a sector strategy secondary fund, say last year, I think 40% of deals or so were TMT. So it's fairly natural to me that if you believe it's important to have sector expertise in underlying, you know, underwriting software companies, technology companies, the size of the market would allow for a specialized secondary market just focused on that. And then if you break that down further, perhaps, perhaps then you have a specific software secondary firm and then given the size of the market, you could go to specific software strategies. So I think where we are right now in the evolution, we're at the point where you have a single company CV fund. But imagining this in 10 years time in the same way as Jan pointed out the evolution on a primary basis, then you know, overall when you think about how industries develop, the big get bigger, the small get really specialized and the undifferentiated have a big problem. And I think as we see some of the largest multi strategy alternatives firms getting huge, it's natural that allocators will want to pinpoint capital on specialized secondary strategies to get to areas of the market that it may not be possible through a large allocator. So I just see specialization going down to the nth level.
- [10:48]
C
Yeah, I have to say I totally agree with that. Adam, you wouldn't ask us the question of would you expect to see a European focused software primary private equity fund because of course you would. There's an established market for geographical specialization, sector specialization already in the primary markets. Secondary markets are just trailing 10 to 15 years behind that specialization in the prime markets, which makes sense. And so, so we're going to see that right now in the primary markets. If you're just sort of an undifferentiated buyout mid market fund. It's tough sledding when it comes to fundraising. It has been for a few years. Where the money is going is specialized people who bring sector expertise, who bring geographic expertise. It's much easier to raise money. We're going to see the same thing happen in the secondary market over the next 10 to 15 years.
- [11:36]
D
And also it will take time. And that's the sequencing of the maturation of the secondary market is it doesn't happen overnight. It has to get to a point where you see that the market opportunity is large enough for capital to then flow into these subspecialized strategies. Track record needs to get built over the next five to 10 years as a generalist and then can go down as sector. And so as you think about the growth of the secondary market, that is what's going to drive it. People say, what's the next innovation in the secondary market?
- [12:08]
E
There's already been a ton of innovation.
- [12:10]
D
And now it's probably the decade of specialization and capitalization rather than the decade of innovation. There is so much to do with what's already here today. What the secondary market needs is the appropriate levels of resources and the appropriate level of capitalization for it to continue down the path of specialization.
- [12:29]
C
Yeah, to the point Nigel made. I mean Maybe we're at 2% penetration on a rolling basis of primary AUM. We are way under capitalized and we're way under resource when it comes to talent. And that needs to grow. Ten years ago single asset CVs were very niche. A lot of buyers were uninterested in doing it. It was a new that we were just coming up with. This is just 10 years ago. Now we've raised multiple many billion dollar funds devoted only to single asset CVs. That's how quickly this is happening and money's going to flow in.
- [13:01]
D
I think another evolution that you can start thinking about is that historically GPs have entered a company and then exited all at one time. If you think about the future and think about a world where you've got maybe two or three GPs and an asset, somebody enters 2015, somebody in 2020 is an equity recap, somebody in 2022 and then maybe that 22 is recapping that 15 investor and then maybe the 20 is doing a continuation vehicle on their position.
- [13:33]
E
What happens is that the company continues.
- [13:35]
D
To operate as an entity and GPS are coming in and out of these assets at different times. And by the way, go down one level and think about co investors into those assets. You might have a co investor that says I don't need to wait until the natural exit of this. We might say, hey, we've done two times in three years, that's good enough for us. We're going to bring that co investment to the secondary market.
- [13:57]
E
So it's actually when you start thinking about the size of this market and.
- [14:02]
D
The potential, it's limitless.
- [14:05]
C
There's also broader take up I think in the market the first five or six years. Remember, especially on the GP LED side, it was a solution to a very sticky problem. In a moment in time it was a lot of angry LPs, it was GPS frustrated that their assets were hung up. After the great financial crisis. People wanted liquidity. GPS didn't want to let go of the assets. So it was a solution to a sticky time. And it took five or six years I think for that to wash off and people to realize this is just another really strong exit mechanism. And as that's happened over, I mean really just over the last five years or so, you're seeing broad take up among LPs, you're seeing broad take up among GPS and sponsors, you're seeing a lot of take up even as buyers among institutional investors. So capital is freeing up, we're seeing demand now generated by LPs pretty broadly. Demand generated by sponsors pretty broadly. That's all just happening really in the last four or five years. So I think we're in very, very early innings there.
- [14:59]
B
I think maybe just add one more. We can only move at the pace of the LPs. I think that's the other thing that to think about 10 to 15 years ago I'd say that a sponsor to sponsor deal was anathema. The idea of one sponsor selling to another sponsor from an LP's perspective was negative because well, what could the second sponsor possibly do to improve the company after one private equity firm has spent time improving it? Now it's 50% of the market. That took a long time to get that level of acceptance. The secondary market is going to be the same and an LP is a fiduciary. Their job is to be conservative. So if I think about the continuation fund market still not universally accepted even though effectively it's 50% of the secondary market right now, there's still groups who are concerned about the conflicts and notwithstanding the guidance that ILPA provided, it will take some time. However, it's completely different from 18 months ago in terms of understanding and acceptance I would say. And the question for most LPs now is how do we play? And to work through that most LPs really need some sort of crystallized performance. We're early days in the secondary market for CVs we don't really have a great crystallized track record. In five years time we will. And so when there's a good benchmark to use for investment purposes then I think there's likely to be an exponential growth. It just takes time and it will be the GPs who create the innovation. But the LPs need to accept it.
- [16:39]
F
Can I push back on this notion that increasing specialization in the secondaries market is inevitable? I mean what would the three of you say to an LP sitting in the Midwest, sitting in the Gulf, sitting in East Asia, sitting in Australia? Who says I have a secondary allocation from our portfolio? It is for diversified de risked exposure to private markets. It is not for concentrated bets on single companies.
- [17:05]
C
Here's what I'd say. This is to the point Nigel made before the big will get bigger. There'll always be a place for the large cap fund that is doing diversified investing. There'll be a lot of LPs interesting, interested in that. But over time as the specialization happens, we will start to see returns that are tied to specialized portfolios. We'll see people allocating at a Finer, more granular levels. So I think it's a false choice. I think there will be a lot of allocation going to large diversified portfolios I.e. the classic secondaries investment. But as secondaries continues to become more sophisticated and more granular in investment strategies, there will be separate investment theses for investing in specialized strategies.
- [17:45]
D
I think that market evolves. I think this is a means to inject liquidity in an otherwise illiquid asset class. I believe that if players and actors have the right process, right structure, right mindset, then what you're doing is providing more options for liquidity in private equity and then to that lp, it's their choice as to when and how they want to lean into it as wide open in terms of the risk returns of all these different strategies. And I think that that depending on the personality of that lp, they will either be leaning forward or following into the market as those changes happens. Changes don't happen overnight, but markets do benefit from evolution. It's not always straight line up into the right, but along the way, you know, the right guidance is provided that allows it to be a positive evolution in the market. There will be examples of when that things have not gone right. And that's part of the learning process of evolution.
- [18:45]
B
Also maybe to add onto that that most investors invest in alternatives for differentiated returns. And I think that as this market continues to develop, if you quote unquote standard private equity, some of the research would suggest there's 10 trillion more of alternatives over the next 10 years. Inevitably, unless the opportunity set increases at the same pace, returns come down. So when returns come down, I think investors look for where can I almost find new alpha, new alph for often find, you know, comes from specialization, you know, reaching into a niche you can't get right now and can't be easily accessed by larger players. For that you need additional return. In a sense you take an additional risk. So that's why I think from an investor's perspective, Adam, you will be interested in, you know, all things being equal, a secondary market that delivers different options, differentiated options and you know, certainly in the early innings, better returns.
- [19:46]
F
Nigel, can you give us the view from the advisory side? So a client comes to you with a specialized portfolio, let's call it, I don't know, a TMT asset or it's a credit portfolio. To what extent are you seeing on the buyer side and are you going to the dedicated sector specialist or asset class specialists first as opposed to the generalists?
- [20:08]
B
I was saying that if we were presented with a diversified portfolio by sector. What we have right now is the ability to differentiate the portfolio by underlying investor. So if there's a real estate component, venture capital component, we know there's a group of investors in each sector who would be interested in taking a look at that portfolio on a standalone basis. We would also continue to go to large players who buy portfolios of all strategies who may for whatever reason use leverage, other financial techniques to be able to take the whole cash flow profile from that portfolio and make it more efficient in a sense from a cost of capital perspective. So our job ultimately as an advisor for our client is to figure out where you get best execution. And not going to the specific cost of capital providers for each asset class is not really, we're not really doing our job. So you know, we would look the portfolio buyers, sub portfolio buyers, you know, individual strategy buyers. So yeah, and we are at the point of the market where there's sufficient depth in each of those buyer groups to make it a credible process.
- [21:22]
F
I would say I wonder if it's worth spending, you know, a minute or two on 40 ACT funds. These are a type of interval fund, I guess a semi liquid fund which is not closed ended so it doesn't have to return all of its capital back to investors after a set period of time. Would any of you, you consider the existence of 40 ACT funds in the secondaries market as a type of specialization?
- [21:43]
C
I think of it more as an innovation in the market. It's a maturation of the market. I think it can exist separately from specialization. We can end up with specialized 40 ACT funds. So I don't think it in and of itself is specialization, but it is maturation. It is reaching into different pockets for capital raising. I have interval funds which are more fixed liquidity intervals then you have tender offer funds which kind of intend fixed liquidity periods but they have some discretion and kind of when and how much they provide liquidity. You have some flexibility on which investor base you go to, sort of how retail you want to go that'll impact what types of fees you can charge. It is in air quotes, permanent capital in the sense that they're not closing, you don't have to keep going out to the market and fundraising. It's money that stays with you. There's no kind of known end to those funds. 40 act does come with a lot of regulatory. It is a much more intrusive regulatory regime than what people are used to. If they're used to living in the world of private funds and SMAs like the 40 act has a lot of regulatory requirements. It's not a silver bullet. But listen, we've seen numbers that a majority of significant secondary buyers either have or are actively considering 40 ACT products. It's clearly an area where people see significant growth, significant fundraising, companies capabilities and we don't see that slowing down anytime soon.
- [23:01]
B
This is a massive innovation in the market. Fortiac funds have actually been around for quite some time but the adoption and the proliferation of them has really taken off in the last couple of years or so. I see just the major innovation of how easy it is to access private markets through one of these vehicles if you are a high net worth investor. So writing a check and receiving a 1099 at the end of the year versus capital calls over a number of years and the complexity of that. So reducing the complexity allows individuals to many individuals who invest in private markets where that was not an opportunity before and so up to now arguably that you needed to be part of a pension fund to access private markets. And the opportunity here is that this is sort of the democratization of private markets in a sense that you can start with a relatively small investment and investment size and then access private markets. And I think that then goes to cost of capital. Right. If something is so much easier to access and it attracts a lot more capital, it's pretty natural to me that that cost of capital then is likely to come down and that is likely to impact the rest of the market if it's raised in sufficient scale. So I think it is a big innovation because it's really taken a lot of the friction out of the market that existed before. Friction allows high returns. So I think it is a huge deal. I mean we're seeing these vehicles participate in many of our transactions, both GP and LP and we don't see that stopping anytime soon.
- [24:38]
C
I think the market's north of $60 billion of AUM now. I think more than $5 billion was raised last year. And I think we're going to see that accelerate for a lot of the reasons Nigel just mentioned.
- [24:46]
F
And for the managers out there who don't run these types of funds, should they be concerned or is this just a further kind of opening up of the market to a wider pool of of investors, opening up more deals, further maturation of the secondaries market so to speak.
- [25:02]
C
I think this is an exciting area. Listen, we've been hiring increasingly building out our team in the space. We think this is an exciting area. I don't think managers should be concerned. I think they should be interested and curious and Looking into doing it, it's accessible pools of capital, it's sticky capital and it lines up actually pretty well with secondary's investment strategies. Like you said, the fortitge funds have been around since the 40s. It's been a long time. But I think people realizing how well they match up with secondaries and allowing a more retail investor base access to this asset class that they've been reading about for a decade now is very exciting. There's a lot of pent up demand there.
- [25:42]
F
Okay, very good. One of the big topics that we should talk about is returns and this is something Nigel, you spoke a little bit about a few minutes ago. You mentioned that some LPs are sort of yet to see returns from investments that they've made, for example in continuation funds and that that is maybe one of the things that is sort of preventing the further growth of the market. What evidence and data and research do we have yet about returns from specialized secondaries vehicles either on the GP LED side or on the LP side maybe.
- [26:15]
B
Starting with continuation funds. And Evercore sponsors some independent research. And I think I mentioned that performance is largely uncrystallized. Largely uncrystallized. However, when compared to a similar portfolio of buyout co investments, what is coming back is that the multiple on a portfolio of continuation funds is going to be somewhat similar to a buyout portfolio but without the volatility of returns, which is what one would expect if firstly a GP is selecting what they believe to be their strongest investments where they've already done well. So for example, if this is a single company where they've already generated three times their money for their LPs, doing three times again is pretty hard. But maybe doing a double from there is possible. And I think that investment profile, that investment return profile will be attractive to many LPs, you know, as part of their overall private equity allocation. So one would expect that the track record would be mostly crystallized in the next five years or so. But the early returns are pretty positive.
- [27:27]
D
Yeah, and look, I think I would say two things around this. So let's step back from continuation vehicles only and just think about the secondary market as a whole. Like we discussed at the beginning, you got to think about the risk return of each of these sub asset classes in order for that track record to mature at the end of the day and for the sub asset classes to gain traction. Maturation track record, it tracks capital and that's the sequence of events that we are going through. I still believe though, and I'm a big believer in this, that the secondary market itself is vastly undercapitalized. So my stats, give or take, depending on the different reports, is that there's been since 2021, $500 billion deployed in the secondary market and only about $325 billion raised. Every year there has been less capital raised than deployed.66 cents on the dollar raised and deployed. And there's nuances to those numbers. But generally speaking, that is the state of the market. If you think about the market that did $160 billion last year and you think about maybe 200 billion of dry powder, look forward to this year. If it hits 200 billion, which we believe it will this year, that means.
- [28:37]
E
You got one year of dry powder.
- [28:38]
D
There is no other market where you've got that level of dry powder.
- [28:41]
E
So when an industry is under capitalized.
- [28:44]
D
Generally speaking, better assets come to market, generally speaking, you've got a better opportunity, opportunity to generate alpha, generate better returns. I think this is a decade of.
- [28:56]
E
Specialization, but I also think it's a decade of capitalization and we're not through the period where there can generate some interesting returns on a risk adjusted basis.
- [29:05]
D
If we're being honest about the different strategies and what their risk return should be. Pref versus single asset, as an example.
- [29:13]
E
I just think that we're still in.
- [29:15]
D
A three to five year period where the market first needs to raise the capital to get it capitalized and then as more capital comes into play, those excess returns may diminish over time. But that's a five year from now problem, not a today problem.
- [29:34]
B
One of the best things about the evolution of the continuation fund market is that in the selling fund, the LP gets a choice. So if they love the asset, they can just roll over and continue to invest. Whereas right now, for example, if that's sold to another sponsor, the LP doesn't have any choice. So whether the LP is in a position to execute that choice is more of a market moment. Where we are right now, in two or three years most LPs will be in a position to be able to execute on the option well, but that will take some time and some sophistication because ILPA in a sense has set the parameters for what is an acceptable continuation fund in terms of how it's executed. And the LP's now now really need to catch up in terms of just putting the processes in so they can really take advantage of the options that are being given to them.
- [30:26]
C
I agree, Nigel, though I don't think it'll be two or three years, we're already seeing that happening across a lot of institutional LPs, even some that were historically resistant to GP LED transactions. So I think it's going to be one year to 18 months before we have a pretty significant majority of institutional LPs in a position to substantively evaluate these decisions.
- [30:45]
B
I think what you have right now in terms of sell rates, which are high, is more the liquidity situation in the market rather than the availability of the option over time. I think this will be a very positive development for LPs, particularly because LPs have different liquidity needs. We talk about LPs, there's very, very different types of LPs, so giving an option rather than forcing an exit in many cases will be viewed very positive.
- [31:12]
F
Speaking about LPs for a moment, Lior, are there any sort of specific risks, I guess, from a kind of legal or even tax point of view, for LPs when they are faced with these decisions with CVs?
- [31:23]
C
So the answer obviously is yes, which is why I have a job and why we have a team of 60 lawyers who are very busy. These deals are complicated. There are a lot of conflict issues, There's a lot of disclosure issues. Obviously the regulator has been quite interested in these deals in this market of years back, the head of the private funds exam unit at the SEC pulled me aside at a conference and said, lior, we just think secondaries, and especially GP led secondaries, are the most interesting thing happening in the market right now. And I thought to myself, of the 8 billion people in the world, I would love to hear that from everyone but him. But it's true. Especially if you go back to when we started these deals, this was really untrodden ground and we were walking very carefully to figure out how to process these deals. What's happened though, over the last 10 years, the industry has matured. I think a set of best practices has evolved. The LPs acting through ILPA have essentially agreed on a set of terms and a process that everyone is comfortable with. I think we have done a good job removing a fair bit of that risk as long as you do it right. Process matters in these deals. Thoughtfulness matters in these deals. Getting the right advisors, financial advisors, getting the right legal advisors, all that matters. You need experts in the space. It is its own space. So, yes, there is regulatory risk and there's other legal risks, and these are complicated deals, but I think there's a pretty mature and strong set of advisors out there who know how to mitigate those risks and lead People through these processes.
- [32:56]
D
I think what's super interesting is just the growth of the secondary market. Now that we've talked about all of these different trends around specialization, we talked about the fact that just in the last decade, from 2016 to 2024, the market quadrupled from $40 billion to 160 billion.
- [33:13]
E
But to your point, this is not a rainy day strategy. Our prior record year was 2021, which was the highest liquidity year on record at $132 billion. And that was during a high liquidity.
- [33:27]
D
Year for private equity in general.
- [33:29]
E
So I think that's a great point in terms of anybody who thinks that.
- [33:32]
D
This is like, oh, rainy day strategy. We don't want. There's all the downside volatility.
- [33:36]
E
It's not just then. So then I kind of go on.
- [33:39]
D
This vision around the secondary market hitting a trillion dollars by 2031. And that's a prediction that I've made over the last little while.
- [33:46]
E
And as I look at where the.
- [33:48]
D
Market was in 2024 at $160 billion.
- [33:51]
E
Where we believe that the secondary market could hit 200 billion this year, we.
- [33:55]
D
Should talk about 2025, how it started, what we're feeling, the optimism around the size of the market.
- [34:02]
E
But then you put into it all these specializations. We talked about private credit secondaries going from 5 billion to 10 billion just last year, doubling. And think about private real estate and private infrastructure, secondaries and preferred equity and nav lending. All of these sub asset classes are adding to the size of the secondary market. And I just really believe that this market has all of the tailwinds necessary to hit. The question will be how do you define secondaries to get to that trillion dollars? But if we say, look, any sort.
- [34:33]
D
Of innovation that injects liquidity in an otherwise illiquid asset class is the secondary market, then there's a real path towards that. I really believe in it.
- [34:42]
E
That's despite over 21, 22, 23, the secondary market flatlined a little bit. People were coming to me and saying, are you still a believer in that? 100%? Because it's in those periods of times that the market gets educated. If you look at 2009 and 2010, the market got educated around all the different tools. And then those tools got used in good times and bad. That's what really drove that size of the market from 2010 to today. We've just gone through an education phase.
- [35:09]
D
Right now in the market market.
- [35:10]
E
We're going through that specialization phase on top of that and that's going to drive capitalization and that's going to drive.
- [35:17]
F
Volume and that's how we get to 1 trillion or 2 trillion as some people, including yourself.
- [35:22]
D
Well, I'm sticking with my 1 trillion, I'm not going to 2 yet.
- [35:25]
C
I mean Yan is the known optimist but I mean listen, if you look at the numbers, if we did a trillion dollars this year, it would still be less than 10% penetration on private equity like Aum. So it'd be less than 10% turnover in private capital Aum. I mean that's not a big number. There's still single digit percentages even at a trillion and that's today. Forget 10 years from now.
- [35:44]
B
I would say one thing that when I started off I think the market was 6 billion and a couple of people asked me why would I go into this space when it's going to be over in a couple of years the banks will have sold and the banks used to be 40 or 50% of LP volume, they're now zero. So it's hard to see forward when you're just dealing with what you're dealing right now. And I think one of the big changes we, when we talk about the growth of the market, we talk about the growth of the market, all things being equal. But what we not necessarily take into consideration is moving friction out of the process. So for example, if an LP could more easily transact on LP positions themselves through some sort of secondary trading market, you're likely to see a material increase in volumes that I don't think necessarily is even built into some of the projections that maybe Yan has. A lot has to be put in place for the plumbing to happen. But if we look at some derivatives market really took off when standard documentation was introduced is the documentation. A project I worked on before secondaries was FX spot trading which used to be a voice call out market. Now FX oil trades most of the FX spot and of course volumes take off. So when you take friction out of an asset class and it's much easier to transact, then volumes tend to go up.
- [37:06]
F
Leor, you and your team must be spending a lot of hours on non standardized issues and thinking that if only this market was a bit more standardized then things could be sort of processed and for your clients a lot quicker. And I'm sure you have a view on that.
- [37:21]
C
I do. It's probably not what you think. We actually like complexity and we like innovation. You think from the lawyer's perspective it's a lot more interesting to work on a complicated deal where we're hoeing new ground than just processing a deal that everyone knows how to do. Once things get really fully commoditized, they become less interesting. And so where have we been spending our time on innovation? First it was just coming up with the idea of GP LED secondaries with our clients who were trying to figure it out, then moving to single asset deals and changing the structures for those. And now it's going to transition to NAV financing and GP stakes and kind of succession planning at gps. And this is where the exciting stuff has happened. We talked about 40 ACT funds. I think that's where we're spending our time and our thinking now. Like I said before, these are complicated deals, these are bespoke deals. It is its own market. It's not a pure MA market, it's not a pure fund formation market. It exists in between all of those and there's real specialization among the advisors and there's real complexities in these deals. There's risks that are not obvious to people who are not experts. And because of that I think we expect, we expect that real commoditization here is a ways away, especially on the GP LED side.
- [38:30]
E
And also it's okay if this market commoditizes because we just spent the last half hour or hour talking about the specialization of the sub asset classes. So as one part of the market gets more commoditized, then innovation and evolution will focus on more specialized needs within that. How do you inject liquidity into other parts of this market? And so this is the never ending story of the secondary market. I always talk about secondary market being the Google of private equity. It is creating new products that injects liquidity and otherwise illiquid asset class and it pushes the market to really think outside the box in terms of how do you create new tools in the tool set. That innovation, that evolution, as I said before, is not always straight line. Whenever there is change in the market, there's going to be some friction. Whenever there's change, there's some learning and.
- [39:27]
C
There are natural market forces that'll push that innovation. One of the byproducts of commoditization is lower returns. It's harder to find alpha, fees get squeezed. So there's natural market forces that when that starts to happen, there will be scale players that will try and take advantage of commoditized products at scale and there'll be the innovators who will be looking to find that alpha and the kind of premium priced products and that'll always happen and if anything, it'll spur that innovation, not slow it down, down.
- [39:56]
D
We're entering 2025 with renewed optimism. Just generally, I think private equities had a tough two, three years. Returns have been anemic, distributions have been low, and private equity went through a bit of a moment. Like any other market, it has moments. But what we're finding is as we enter 2025, a lot of the things that we're blocking, deal making certainly has. The tides have turned. We think of private equity has just gone the four seasons. In 2022, it was the fall, it was after the summer of 21, 21 generated excess returns for private equity. In 2022, the tides turned.
- [40:33]
E
And then 2023 was the deep winter.
- [40:36]
D
Things kind of came to a halt. As a Canadian, I understand the four seasons pretty well. What happened in 24? Well, the spring started coming and so it was slow. In the first half of 24, the ice was starting to melt and you saw the drip of the water. And by 2024 the snow was gone from your front yard. And we're entering 25 with spring in the air and a spring in the step. And I do feel like there's just a different level of optimism. As you talk to dealmakers out there, as you talk to investment bankers out there, advisors, the fluidity in the market has come back, by the way, to get to $200 billion in the secondary market, you would say, well if distributions are coming back, isn't that going to limit the amount of secondaries required? Yes, but distributions are coming back. But guess what, calls are starting to come too because GPS are starting to deploy capital. So LPs are going to be running on the Tre treadmill in 2025 with more distributions, but more call staying over allocated secondary market now kind of trading in high quality buyout, low single digit discount. That's going to bring more people to the market as they try and tactically reallocate. And GPS are still looking at continuation vehicles as a great way to generate distributions to their LPs ahead of their next fundraise. So the necessary ingredients we think are there for an interesting 2025. And I'll just.
- [41:51]
B
Yeah, I would reiterate that. I mean this is the fastest start we've ever seen to the secondary market. And it's a secondary market right now firing on all cylinders and all cylinders being LP gp, single asset, multi asset, the likes we've never seen before. And part of that is what Jan just referenced in that distributions are coming back. Capital calls too And a lot of LPs have sort of got a little bit tired of waiting for distributions from their underlying managers. And I think even as we look at the M and A market right now, distributions are probably mostly going to be back end of this year, back half of this year, beginning of next year. Just it takes time to sell a company. So we see a lot of LPs just taking their liquidity needs into their own hands in the face of an attractive market, I would say so where pricing is good and good pricing generates more activity, activity generates good pricing. So. So I think we're on a flywheel of success here. Heading towards certainly what Yann was talking about. A $200 billion year is certainly within sight.
- [42:54]
D
I think that should be the title of this podcast, flywheel of Success.
- [42:58]
B
I love that.
- [43:02]
C
I agree. When we look back, 21, obviously I think for all of us was probably the busiest we've ever been, but it was actually a pretty narrow slice of the market that was active. It was totally dominated by high quality single asset CVs. That's what people wanted to trade in. There was a lot of nervousness around the pandemic. So as busy as it was, it was actually a very narrow market. I'm not sure it was a healthy market. When you look at it now, it's a very robust market. To Nigel's point, we are seeing every type of deal across different industries. We're seeing a lot of variability in pricing and in products. We're seeing more fundraising in secondaries. It's just active and healthy at a much broader way than it was in 21. One of the measures at Davis Polk that we look at, and we obviously are reflective of the market, is how many matters do we have open, how many of our, our sponsor side clients are actively looking, how many matters do our buy side clients have active at the moment? And we're running right now close to double what I would view as our kind of normative numbers on both ends. Virtually all of our sponsors side.
- [43:55]
D
Are you calling a $320 billion market this year?
- [43:59]
C
Let's go 350. I'll be the optimist, I'll take over the Crown. I think 200 billion is well within sight. And at the growth rates that we've seen, I mean, 200 is right within sort of normal growth range for this market for this year. So given the start we've had, very fast start, seems perfectly realistic.
- [44:15]
F
So a lot of optimism, Nigel, that you said that the fastest start we've ever seen. Very optimistic, Yan.
- [44:22]
D
And Leo, Adam, what about you? You'd mentioned some stats.
- [44:26]
F
That's a very interesting point. Yes. So typically our reporting team has X amount of leads that we're chasing in the market that we try and convert into stories. We have got around 10 to 12 times more the number of leads than we typically want would.
- [44:41]
D
So you're calling a $1.6 billion market in 2025?
- [44:47]
F
Well, either this means, you know, our reporters are out there speaking to more people than they usually would and finding out more than they usually would, or it means that the actual market is really growing. But what I hear from you gentlemen is that.
- [44:58]
D
So I'm going to put you on the spot, Adam.
- [45:00]
F
Go for it.
- [45:01]
E
Is this going to be a $200 billion year?
- [45:04]
F
Well, I wouldn't be one to give, you know, advice on what's actually going on in the market, but based on the conversations that I've had, it seems like that could potentially be, you know, somewhere in the ballpark. If it's a $200 billion market, I'll buy you all a beer.
- [45:18]
D
How's that? That's amazing.
- [45:20]
C
On the record now.
- [45:21]
F
I look forward to it. Nigel Lior and Jan, thank you so much for your time today.
- [45:25]
C
Thanks, Al.
- [45:26]
E
Thank you.
- [45:28]
A
That again, was Nigel dawn of Evercore, Leor Landa from Davis Polk and Jan Robard from Dawson Partners. As always, you can listen and subscribe to Secondaries Investors Second thoughts podcast@www.secondriesinvestor.com or wherever you get your podcasts. For Secondaries Investor and pei. I'm Adam Lay. Thanks for listening.