Dry Powder: Live from NEXUS 2026

[Music] Today on Drive Powder, we're bringing you a live recording from the PEI Nexus Conference in Orlando, Florida. My guest is Jennifer Choi, the CEO of Ilpa. As the leading voice for more than 600 institutional LPs, Jennifer has an unmatched view into what the LP community is thinking and prioritizing right now. This is a moment of real uncertainty for institutional investors. The Quitterty Reveins constraint, continuation vehicles have gone mainstream, retail capital is arriving faster than many expected, and deeper conversations are underway about the long-term role of institutional capital at the intersection of private wealth. We're fortunate to have Jennifer on the show today to unpack these pressing questions for the industry. I'm Hugh McArthur, chairman of Bains Global Private Equity Practice, and this is Drive Powder. [Music] Jen, welcome to the show. It's a pleasure to have you on today from Nexus. Thanks so much. It's great to be here. Let's talk a little bit about 2026. We turn the corner from 2025. How are you feeling about the private markets in 2026? What is the LP view? How are things? I keep asking myself the same question. How do I feel? How do the members feel? I don't think there's yet a distilled singular view. I think that it really comes down to, how was your 25? Did you see DPI? What are you expecting in the year ahead as far as returns? What I will say is the conversation that LP's are having internally about private equity feels very different. I mean, I've been around this business now 24 years, I suppose. And this feels different. It feels like the questions are a bit more challenging and it's harder to get the right answers to really defend the place for private equity and portfolios. And so, LP's are talking to each other and they're talking about things like, what are you underwriting to right now over the next three, five years? What are you looking for in your portfolio? What kinds of shifts are you making? There's a lot of talk about moving down market, moving into the middle market. Well, if everybody's moving into the middle market, what happens to the alpha that you thought you were going to be able to realize there? So, I think that people are in a seeking mood and they're looking for answers kind of within the collective and they're really trying to benchmark their thinking against that of their peers. And what's really driving that? What's causing this shift in mood on the part of the LP community? It's the underperformance relative to the public markets in a sustained fashion and the fact that distributions as a percentage of now are much lower than we'd seen historically. And so, there are questions around what about our models needs to change? What about our pacing? What about our plans? And the questions that are coming from, say, boards relate to, do we have the right allocation to private markets to private equity specifically? And we could talk more about how its LPs and its allocating organizations think more holistically about their exposure, maybe a little bit more risk aware in how they're putting money to work. That could have follow-on impacts for allocations to private equity. Okay, so DPI has been below normative expectations for a while now for four years in a row, as you've noted, which is unprecedented in the industry. So, there's a little bit of a liquidity question I haven't seen the money, so where is it? Also, the returns which have been pretty good to your point have been kind of matched by the US stock market at least over the course of the last decade or so. Is that causing any LPs to think about their allocation decisions? Are people actually thinking, well, maybe I have too much private asset exposure or do I want private equity for diversification purposes? But what kind of discussions are going on with LPs that you interact with? There are a few things and a few different threads, I think you could pull. One is looking at geographic exposure. So, maybe I still have conviction in private equity specifically, but maybe I feel a little bit over-allocated to the US or maybe I feel a little bit over-allocated to large caps. I want to re-examine in which part of the real economy am I actually playing through the managers with whom I invest? And you might also be seeing some look at do I want private markets exposure more through an equity play or through a credit play? So, I think that there are lots of different threads to the conversation going on right now. I wouldn't say that there's an across-the-board sentiment around reducing private equity per se. I think if I still believe in those asset classes in this strategy, how am I going to prosecute that belief? Right. What chips do I want to place where on the table? So, Jen, let's shift gears a little bit and talk about some of the specific trends that we're seeing in the marketplace. Now, obviously, one of the major topics that we read a lot about, we see a lot about over the past year or two have been continuation vehicles as a way to provide liquidity in a world where we've got this bit-ask spread problem, interest rates are real, and we've just had a big unlock that's required for many, many portfolio companies around the world. How do LPs in general feel about these continuation vehicles? Are they confident that this is a good way to proceed in at least some instances or are they more skeptical of what what's your take? So, it's nuanced and I think that the LP perspective on continuation vehicles has evolved over the last few years. When continuation vehicles really felt like they were becoming more mainstream, Ilpa released guidance in 2023, which is usually a marker when something is probably at peak or just past peak if Ilpa has come out and said, "Hey, there's a good way to do this and a bad way to do it." And at that time, I think the view was majority quite negative and that's not unusual. I think sometimes when the industry starts to embrace innovation, if it's not well explained, if the rationale is not sound, you're going to have that kind of a reaction from the LPs, which is a reflection of poorly managed or poorly disclosed conflicts of interest and maybe underwhelming transparency. And so, I've heard a lot of that. It'll let you to say a little bit more about it. It's like, "LPs don't like this, LPs don't like this. You 96% of the dollars cashed out." On the one hand, I hear that tone and yet behaviorally, everybody actually takes advantage of the continuation vehicle to get liquidity. Is there anything to that? Then that's the challenge with this particular data point. There's a huge disconnect in this case between what LPs are doing and what they believe. So, their actions are not a signal of their beliefs. So, it's really important to divorce the two. For most LPs up until pretty recently, the default was always to take liquidity. Why? Because often, these CVs represent new legal documents. It's a new review process. There are governance reasons for a lot of LPs that prevent them from even entertaining the possibility of rolling into the new vehicle. And the timelines for them to make that decision do not jive with their internal capabilities and the staffing that they have. In early 26th sitting here at Nexus, there are LPs that are seeing a CV a week. That's on top of your day job, which is selecting managers, re-upping with your existing managers, monitoring those relationships. So, you have that and then you have CVs coming in that are, especially if you don't sit on the LPAC and you don't have that advanced view, these are not things that you can prepare for. So, you've got governance challenges, you've got a window at time challenge. So, how early in advance of a transaction do you have awareness that is coming so that you can make the space to do the proper level of review yourself to underwrite whether you want to participate or not? So, there are lots of reasons why LPs take the liquidity that have nothing to do with needing the liquidity or appreciating these as a mechanism to get it. That's fascinating. So, what are some of the tension points that you're seeing around continuation vehicles between GP and LP relationships? So, first, a status quo option. So, we've been talking about this for years now, but LPs really would like to see a genuine status quo option and to paraphrase something that one of my members said just earlier today, a status quo option is the email about this comes to my inbox and I can delete it and nothing happens to it. We know that that is not occurring in market today. So, the fact that there is no option for an LP that doesn't want to either take liquidity or have their interest rolled into a new structure is not on the table. That as a starting point, I think, is problematic. The lack of a true pricing discovery mechanism is another. So, there are real questions around the valuations that which these CVs are transacting, the prices at which they're closing. And so, you will often see LPs advocate for some sort of an arms length deal taking place ahead of the CV and people can come up with different advanced timelines on that. But, something to give me an indication of whatever valuation is attached to the CVs grounded in some measure of market reality. Right. And not the product of what is an effect. And this really, I think sums it up nicely. CVs are always conflicted transactions. They are because it's the GP selling to themselves. Right. So, they are on both sides of the deal by their very nature. So, there are lots of things about these that are inherently conflicted that a GP has to manage quite carefully to preempt and anticipate and address some of these concerns. And so, I mean, is there a way to work around that? I mean, it seems like an inherently very complicated structure with very differing incentives. As you said, it's a GP selling to the GP. The LPAC is a little bit conflicted on one side or another. The second area is buyer who is leading it is buying it at discount so they're pretty happy. And the rest of these LPs are getting maybe one week on their desk saying what the heck do I do with this? And so, is there any kind of an incentive structure that can be put into place to encourage a more sort of objective view of value? I'm going to quote someone. I do not want to take credit for this, but there is a member who uses the phrase "Schmuck Insurance." And I think you should totally get credit and eventually get a nickel every time someone uses this term going forward. But in effect, it relates to when a continuation vehicle then transacts again where there is a realization out of that CV within some short span of time say 12 months of when the deal initially closed. Because the thesis around these things is often that this asset has more runway. There's more value to be had here. Well, if you then turn around and sell the asset in less than a year, it really does kneecap some of the arguments that went into the industrial logic for doing the deal in the first place. So that's one. But I think you mentioned LPACs. I would go back to that for a second. The only real governance mechanism that exists in these funds is the LPAC. The LPAC is the first port of call for any conflicts associated with the transaction. Their remit is to wave those conflicts or to not wave those conflicts when they're first presented. And so to the extent that the LPAC is really being given the information to do their jobs has full transparency into whether or not the process follows best practice and Ilba has published what best practice looks like. That could be helpful. And if there were some standardized approach to summarizing how did the process come together? Where are the different attributes of this particular deal to give LPACs a standardized lens to look at these things in a more objective fashion? That could help. And is Ilba working on such a standardized construct for LPACs to actually use? The answer is we are having the conversation now about what kind of an asset, what kind of a tangible very concrete tool can we put into the hands of members, those who sit on LPACs and those who don't. That could also be helpful for GPs who want to stream line this process and make it all a lot more efficient and make it feel better. I think that makes a lot of sense because as you say, if you do it the right way, a continuation vehicle can make a tremendous amount of sense. I mean from a GPs perspective it's you know, I buy 15 or 20 assets in my fund and there are three of them that are terrific and once I've held them for a while I decide I want to hold them because the value will keep compounding for another five plus years and I'm willing to put my money where my mouth is as a GP. And in theory, LP should say terrific. Like if we have the right structure and the right incentives in place and we all have the right template and we also understand what we're doing, that should be a good thing, actually be able to extend the life and extend the value creation process. The question is, how do we actually get to that point from where we are now? Which is why you're developing these templates and ways for LP's to communicate and for GPs to actually communicate in a way that's helpful for the LP. Are you expecting as a result of some of these conflicts that there's going to be meaningful pushback on continuation vehicles in the next 12 to 18 months? Have we seen the peak in 2023 or are we going to continue to see more of these popping up and more issues? There's no reason to believe that CVs will slow down. Especially if fundraising continues to be challenging for GPs, what could stop the CVs from happening is if the underlying quality of the assets being transacted suffers and if the buyers on the other side of the deal see that and don't agree to pay whatever the asking price is, what complicates things is who are the buyers on the other side of the deal? And depending on where that demand is coming from, how hungry are they for product? And especially if the valuations to your point are sufficiently discounted, you know, woe to the LP's in the fun to or selling their interest and not able to read the upside. But if the demand continues and there are lots of signals to suggest that it will, if you look at what's happening in the secondary's market and what's happening as far as retail capital and the demand there, the almost sensational demand for access to these assets, it's hard for me to see what slows this down. Right. So we're going to see more continuation vehicles when you talk to members, what do they want to see most in terms of liquidity? So the number one answer is conventional exits, comma, below marks if necessary. Now we can have a whole conversation about marks. Sure. And whether the marks are right or not, because how many of these assets were bought maybe at inflated prices or during the peak of the pandemic, but they want conventional exits and failing that second option, and you know, we test for this all the time. We're constantly asking LP's this question and the rank order is very consistent. We've been asking this question for about three years, conventional exits, 56% of LPs. Hold the asset for longer if need P40% of LPs. Okay. Continuation vehicles, 24%. So it's very consistent. There are things that are further down the list as far as how the liquidity should be generated. Now facilities lay at the bottom. Yeah. And this is really a point of I think interesting stress in the market right now because we have had four years of below average liquidity coming back. And a lot of these deals, people don't realize these are not necessarily 2021 deals. Those are just in the fifth year of their ownership, but we are way under normative liquidity for 2017, 2018, 2019 deals. And if you're an LP, you're looking at these deals and say, okay, well, since this deal was underwritten, we've had a worldwide pandemic, we've had unprecedented inflation, we've had unprecedentedly quickened and severe interest rate increases. And now we've had tariffs and other macro issues. And what the heck are these things worth? Like it's a real question, right? And if you're not seeing the liquidity come back, it's very hard to have the confidence that it's worth what the market is on the asset. Because from a GP perspective, you've also had very little incentive to mark anything down. We haven't had a big recession here. The stock market's at an all-time high. Private transaction multiples do nothing but go up. And so on what basis are you going to be marking something down? If you're a GP, you're saying, look, I need more time to get from all these macro dislocations, to get the value that I under wrote in the first place that I think is there. But at the same time, we're starting to stretch to an average holding period of seven years plus. And IRs tend to mathematically go down after that period of time. And the liquidity hasn't come back. And so that's a real tension in the relationship, right? Because as an LP, you want the liquidity at an acceptable return. As a GP, you want to deliver the return that you promised. And we've got these things that have been in the way that are kind of elongating that entire process and ratcheting up the tension over time. Absolutely. And I don't only talk to LP. So talk to GP, too. Well, sometimes, sometimes. But in some of the conversations that I've had with GPs about this very tension, the challenge for them is that LPs are not a model with, right? So you will just as I rattled off some statistics about what LPs tell us they want or what path the liquidity they most prefer. Well, GPs are hearing some mosaic of that. And so they have to navigate. If I do just pursue a conventional exit, but I know I'm not going to be able to make quite the return that I promised, are you going to hold it against me in the future? And maybe some LPs will, and maybe some LPs won't. And I think the challenge, too, is that LPs have very differing liquidity needs. Someone would just like to see as much compounding as possible, right? They want to see those multi-generational multi-decade long returns and others have more immediate and near-term liabilities to satisfy. So it's not easy for the GPs to navigate. No, totally agree. Let's talk about another major trend that I know your LP members are interested in private wealth or so-called retail capital has started to enter into private equity, private assets, and at a pretty good rate. What guidance is ill-book giving members about the rise of this private wealth or retail capital? The guidance that we are really leaning in on right now is that you need to educate yourself regardless of where you are invested in the market. I think there has been an assumption that if you don't invest in large-cap multi-strat managers, you don't invest in publicly listed managers who have been most out in front of this. You're somehow insulated from the impacts that private wealth and more broadly retail capital. 401 capital eventually, the executive order response has not yet come out from the SEC or Department of Labor, but it's coming, and it's a question of how fast and when. The notion that the only GPs who are really going to take advantage of this and be able to absorb this capital are the very largest, obscure's effect that it's already happening in the middle market. It's already the RIAs are already seeking out those relationships, are already making those investments because they see the same alpha that the institutional LPC and frankly there's a need for product, there's a need for deal flow. Where will they get that deal flow? Right. So we have been really cautioning members to not ignore this as a phenomenon that will have an impact regardless of where you invest and moreover it's going to have a trickle-down effect on valuations and on returns. Returns compression is a recurring theme around this topic. I think LPs generally who have been leaning in a bit more on retail recognize that returns compression is coming for everybody. Okay, let's unpack that one in a moment and given the situation you just described what are some of the most important questions LP should be asking GPs about their private wealth ambitions and strategies. At every stage of the process there's a series of questions that LP should be asking and we released guidance last year that lays all of this out and it's several pages of questions in fact but when you think about during the fundraising process there's specifically the language that you should be looking for as relates to the size of the fund as relates to how much capital can be brought in outside of the fund available for investment into the same assets. As part of the fundraising conversations and diligence also asking how the GPs going to manage co-investment allocation. This is a primary concern for a lot of LPs. A lot of our members are very worried that they're going to see some erosion in the availability of co-investment opportunities for them as a result of the retail capital coming in at a lower cost of capital to the GP will be a more attractive place to allocate that co-investment deal flow. Well, you also as you just said you need deals to actually provide liquidity. You need deals to have month to take money into scale and you also need to have deals to be able to sell things and then liquidate. Exactly. So a couple of other things I would call out are the time and attention of the GPs. So who within the GP and this is particularly relevant for the GPs that don't have hundreds and hundreds of people. How will the deal teams time be allocated between satisfying the needs of the retail vehicle or the private wealth investors who are not in the co-mangle fund and those who are in the co-mangled fund. So there are lots of questions around allocation, time and attention, economics. Of course, the economics for these vehicles looks quite different from those, the economics of the fund. Right. So this sounds like a very complicated issue and if you're an institutional investor you have to think about a lot of things and one of the primary things that you mentioned earlier that I want to come back to is returns. What are LPs that you talk to expecting in terms of returns over the next couple of years and how is private wealth and retail capital going to impact those? They're expecting returns will come down. And part of this, if we go back to even the CV and the retail issues are so interconnected in some ways. When assets are being transacted into CVs at a discount being purchased by secondary buyers and sometimes through retail vehicles or as a result of retail vehicle demand, what's going to happen to the performance of the fund out of which that asset was transacted? It's really difficult to imagine a world in which you don't see the fund level returns deteriorate as a byproduct of the fact that you're taking your so-called trophy assets and pulling them out. So one factor is you've got lower cost money coming in in different vehicles and form a private wealth. Another factor is if you believe you're taking the best assets out that you can get liquidity for and you're putting them in continuation vehicles by definition what's left is at a lower return threshold. Are there concerns about the acceptability of the returns going forward or is it going to be just well, it's a mature industry of course there's more competition there are more ways to play and so this is what happens in maturing industries you get more players competing with each other and it's a normal thing for returns to edge downward. Is that a reasonable narrative or is that kind of like no, I don't go there? Well it's tough because it really depends on whether or not you're holding yourself up against the public markets or not. So if this is all about what I can get from one dollar in the public markets versus one dollar in the private markets I think it does become there's a tipping point beyond which it's no longer acceptable and that goes back to the very challenging conversations that LPs will continue to have with internal stakeholders. But I do think that there's also, we always talk about bifurcation right there there is also this we're on the cusp of maybe even intensifying bifurcation among managers so as LPs are placing bets today there are two kind of areas of inquiry that they're leaning into and if they're not you've heard it from me please do one is of course what are your intentions around private wealth and retail capital not not when it's coming in through the co-mingled fund when it's being managed through a separate vehicle that is very different economics than it's competing in some ways for allocation to the same underlying assets. What are your intentions around retail capital and how will you manage the inherent conflicts right that exists when it's a parallel vehicle but being managed very differently and the other relates to whether a GP has done a CV how many have they done how did they do those right and were they aligned in their approach and so I do think that LPs are going to be increasingly actively selecting away from managers who are very clear about intentions to scale their own growth in part by tapping into retail money and or are leaning a bit too heavily on CVs as a default path to liquidity and where it's becoming normal course of business you hear about in the middle market some GPs understanding that this is just something that they're going to do in every single fund and maybe they're going to do one a year or something like that so you really have to understand how do you view these as a mechanism for delivering returns for your LPs and being upfront about that and obviously things can change over time but the more you can get upfront on these issues with the GP and you might see LPs vote with their feet as a result. Interesting. So we're really in some complicated times here and I think it sounds like it's going to take a while to figure out how this all shakes out. I mean continuation vehicles have really only been around for 10 plus years and at scale you could argue they've really only been around for four or five years so we don't have a lot of results now what how they well lived done how well the unrest of the underlying fund is done private well for retail capital is relatively new you mentioned 401k's we could be seeing all different types of products different players in the market we could see traditional asset managers now offering private equity products are beginning to see that over time as well as the large public also offering different types of products but to your other point this is it seems inexorable that half the world's wealth that's held by individuals is going to find its way down into the middle market and almost every GP is going to be faced with a question of how do I play in this market and for an LP that's got to raise a lot of questions and complexity around where am I going in the next five or seven years so what is your one burning piece of advice to an LP given this kind of situation that were it I would go back to where we were a decade or more when you started to see an influx of sovereign wealth capital how long ago was that maybe it was longer than that you but there was a lot of dialogue at the time about these big pools of capital coming in very disruptive to the industry can the traditional institutional LP keep up can they remain relevant or not fast forward to 2026 I would argue here we are in nexus there are lots of institutional LPs here they're very much in demand by the GPs who are here I would argue that they are indeed still relevant yes however I think that the dialogue around how to stay relevant is as sharp as it's ever been so LPs are actively thinking about how can I be a compelling and attractive partner to my GPs this is about partnership at the end of the day so yes the wave of capital is coming we can see it for standing on the beach you know the wave is not that far out perhaps and LPs need to think about what place does private equity private markets have in my portfolio today and what place will I hope that it has in the future and how can I ensure my relevance as a partner so that I can attract the very best partners possible to help me get to where I'm trying to go I think that's just critical being relevant as a partner in understanding as an institutional LP how you're relevant to your GP partners because you're to your point you're going to have some very large checks on one side and the very smallest checks on the other side there to provide an awful lot of capital and private markets and so making sure you actually know what your seat of the table is and that you are a partner for the GP is critically important for NLP. Absolutely. Jen this has been terrific I wanted to thank you very much for coming by the studio and taking some time out of your busy schedule at Nexus to illuminate the world of LPs and what's going on it's a fascinating space and I'm sure the audience learned a tremendous amount I know I did. It's always fun thank you here. I'm Hugh McArthur thank you for listening.