E23: Liquidity Solutions in the Private Markets with Ahmet Yetis of Evercore

Thanks for coming back to the latest episode of the Critic Clubhouse. We are your one stop shop for all things credit. Before we jump into our next episode, we have an exclusive offer for our listeners. If you're interested in attending any of our conferences throughout the year, we have a great deal for you. Just head to www.dealcatalyst.io, pick the event you want to attend and enter the promo code credit at checkout. This will give you 10% off any ticket to any conference. As always, don't forget to follow the show, rate us and leave a review. We encourage your feedback, it will help us make these episodes a better listen for you. And now onto our next episode. Welcome back to our latest episode of the Critic Clubhouse. As always, I'm your host, Todd Anderson, head of content and programming at Deal Catalyst. Joining me today is Ahmed Yetis, Senior Managing Director at Evercore. Ahmed, it's really great to see you again. Thank you for your time and look forward to today's episode. Likewise, thank you, Todd. So I'd like to kick off with kind of a broader trend. We've seen, you know, private markets kind of take off the last 15, 20, 25 years. I think Phil Tutolo described it to me as kind of 65 private today, 35 public, when you would flip that number a generation ago. You know, kind of what are some of the drivers behind this? Do you see this shift continuing? Like are we going to get to 9010 or are we kind of settling in kind of where we're at today? What are some of the things that are happening in the market that have grown the private markets to where they are today? That's a good question, honestly, and that is something that I am not paying as much attention to it. As you know, I am very focused in certain parts of the private markets. But the growth of the private markets is definitely, definitely visible and obvious. Now, if you ask me, if that growth is going to continue, I believe it will, but at some point it's going to have to plateau and we will get to a, I know I'm not telling you things you already know, but I expect some growth to happen, but I don't think it'll grow as fast as it has in the last 10, 15, 10, 15 years, I would say. If I have to bet, I think we are getting close to the stability between private and public markets. No. Is one of the benefits of the private arena that you can get more creative with structures? You can kind of manipulate things, but in the public markets there seems to be a standard and there's kind of boxes you need to check, does the private market give you a lot more flexibility? Yeah. That's true. That's a less regulated, definitely. I think that has an effect on it. More open to institutional investors, but obviously I'm sure you follow that too. There's talk around democratization of the private markets, which then start making some of the GPs accessing the retail market and what have you. I think these are just natural evolutions of financial products. Obviously, we've come to know one another because of our fund finance conference the last couple of years, and clearly that space has exploded the last few years. I'm curious, how much of the growth can be brought back to the challenging environment for LPs, getting distributions? The fundraising environment for GPs has become a little more challenging. Are some of those motivations playing into some of these products that we see on the fund finance market? Does that play into it? Is it just the growth of private market and the growth of private funds? That kind of what are some of the motivations that have helped fund finance maybe jump to the level it's jumped to today? I think it's both. At the end of the day, the structures and products that we deal with are fairly complicated and what have you. The issuers, potential issues just need a strong incentive to pursue these complicated structures and offerings, and I think the difficulty in fundraising and liquidity environment is just giving the issue potential issues, those types of incentives to actually do the work understand the market and product and become a little bit more open to exploring these alternative ways to fundraise or generate liquidity. So you lead EverCore's private capital advisory group, leading structured capital solutions and debt capital markets, efforts, ultimately what does that mean and if I were to ask what does EverCore look like today as a firm? Yeah, no, that's a good question. So EverCore, obviously a lot of people know about EverCore, but we are known for our M&A business, M&A advisor business, right? That's how the bank started, but then we are also very strong in the private markets. We have a couple of verticals in their PCA private capital advisory groups that is the secondary side of our private markets practice. And in there, the broader team is about 160 people globally and we have three verticals. The GP lead second there is vertical where we set up continuation vehicles as we could have the solution for the GP, as you know, the second vertical is the LP lead second there is business, which is where we sell LP portfolios in the second there is market. Both markets obviously are related and the third business is what I lead the structured capital solutions which is what we started about three years ago when I left UBS to join EverCore. So those are the three legs of the stool and the reason why I joined, there are a couple of reasons why I joined EverCore, right? So what I do is viewed as fundamentally important for the broader PCA business. We are basically one stop shop when it comes to liquidity needs for the private market participants, right? And selfishly from my perspective one of the key benefits of doing what I do within EverCore PCA is the access to the private markets. There is no large GP that we don't talk to. There is no large institutional LP that we don't speak to. The team as I mentioned is 160 people strong globally. The entire floor is the know how we have on this floor around the products, the strategies and the managers and the investors is second to none, which is one of the reasons why my team has grown quite a bit from three to now about a dozen and pretty soon we are going to hit I think 16 or 17 people. And let our success basically if that makes sense. So you reference the kind of a couple of things there related to liquidity. LP's are clearly still finding the way around certain products like nav facilities, maybe through lesser extent sublines. Have you seen the LP kind of education gap start to close the last couple of years? I mean, I had someone from Ilpa on that he was probably a month or two ago now who had talked a little bit about the LP perspective of nav facilities which still wasn't great. And the kind of the education gap that still exists, the LP's that you're talking to, you starting to see that that kind of shrink as they get more used to working within this market. Yeah, it's definitely getting better, right? And we started seeing more of that, especially after we did a couple of our LP transactions. We talked to LPs all the time as you can imagine. And most of them now have heard about our CFO capabilities and some of our, they've seen some of our CFO transactions. So when an LP thinks about liquidity and when they come to us, you usually attend those meetings together with our LP team and we put their options in front of they can sell in the secondary market, which is what the LP team does. We can do a CFO in the capital markets, which is obviously what we do. But sometimes the, this CFO product can be perceived as too complicated, especially if this liquidity need that the LP is trying to solve for is more like a one time need and may not be repeated on a go forward basis, CFO could be an overkill. Then we talk about nap financing or preferred financing. So those are the like the big three or four big options that we put in front of the LPs. And we walked them through the pros and cons of each option, obviously the secondary market. Pricing is key criteria, cost of liquidity in our world is a key criteria. How much liquidity they can generate through CFOs versus NavLo, NavMarket is another important criteria. We spend a good amount of time with our LP clients early on to help them kind of make it this is in terms of what they're going to pursue. And sometimes they decide to work with me. We do a CFO. Sometimes they decide to work with my colleagues in the LP team and both, you know, that's what I meant when I said we are more of a one stop shop when it comes to liquidity needs. That's the type of LP change the answer to that question insurance company pension fund, sovereign wealth fund like do the different types of LPs out there. Do you see that they have kind of different motivations or does it really depend on kind of the individual need of a certain point in time that they might need liquidity? Yeah, so the overarching need is liquidity stating the obvious. But then you always have supplemental objective so to speak, right? So like from the insurance company's perspective, a side benefit to sponsoring a CFO in addition to generating liquidity is reduced capital consumption, right? So they can reduce the dollar amount or private market exposure and then they end up applying high risk-based capital charges, but then the final dollar amount can be lower. So that's a side benefit from an insurance investor's point of view. If a large scale family office, for example, sponsor a CFO, yes, they get liquidity, but that also implies leverage, right? So they're putting on leverage on their private portfolio. And if the quality of the portfolio is good and the portfolio performs, then they will have earned levered exposure, levered returns on that portfolio, which then it may improve their overall performance, if that makes sense. So there are multiple, there can be multiple objectives in addition to just the liquidity. One comment, one of our family offices made actually, which I liked, they basically said they are almost in full control of deploying capital, but they have very little control over receiving capital. So the CFO program basically improves some of that dynamic so that they can be slightly in better control of cash inflows, so to speak. Are some of these structures getting even more complicated, say from two or three years ago to today and maybe two or three years in the future, are we looking at even more complicated structures? Yeah, I think that's also a natural evolution of financial products, right? So the first couple of CFOs we did back in 2021 was pretty simple. Two or three most rated tranches, fully funded, we didn't have delayed draw features back in the day, for example, and then unrated equity. Over time, we started seeing delayed drawing, rated notes, delayed drawing equity. We started seeing pref equity transactions, I'm sure you heard about it. Some of that was publicly announced on Bloomberg and what have you. We started creating what we call a hybrid CFO, which basically combines seasoned portfolio of assets to see the vehicle, the CFO vehicle, and then the vehicle making new commitments to new funds. We checked quite a number of boxes from a structuring and syndication perspective. We call them hybrid CFOs in a sense that it's like a hybrid between a GP, CFO and an LPCFO. We did one interesting structure for 30 with 30 year maturity, basically. This was a fundraising tool for one of our GP clients, and the third, the amount of money we raised basically is locked in semi permanent capital that can be invested and redeployed into their into a number of their funds. So that was quite interesting. I think those are the, and then now we are combining closed-ended funds with open-ended funds in CFO formats, which improves the liquidity profile, because open-ended funds at these are redeemable, up to certain gates and what have you. So yeah, we are trying different permutations and combinations to improve the performance of the vehicle in general, if that makes sense. I mean, it's part of the reason someone would come to an ever-core versus say, Bull's bracket investment bank is the flexibility and kind of the one-stop nature of kind of where you guys play. It seems you've become a specialist in some of these areas. That's exactly right. I think, like, this is something I keep telling you to our investors and clients. When I was at UBS, I started this business when I was at UBS, and UBS is a balls bracket bank, we had an army of salespeople, both investment grade and high yield and what have you. But what ended up happening is pretty much, I ended up talking to all of the investors during this indication process, unlike a regular-way DCM business where you basically, you do a teaching and the sales team goes out and sell the securities. I ended up speaking most of the investors, which, you know, tells us that this is a specialist market. The people who syndicate the transaction need to know a lot of details about what goes into the vehicle, why we did what we did, for example, we get a lot of questions around those. I think it's more important to have dedicated team of specialists in the space than an army of salespeople to be successful in our product. I mentioned the GP client, the LP client, how different is the GP experience through some of these versus the LP experience and how different is the motivations for the GP versus the LP? No. Very good question. So, LP's have been doing CFOs for much longer, I would say, right? You have Tomasek outside of the U.S., which has issued about eight CFOs. You have Nassau and Kuna off-drive and joined them, insurance company, the U.S., which have issued between the three of them, I think they're about seven or eight or so CFOs deals and it's been going on for some time. They've been doing it for longer than the GP's. GP CFOs really started picking up in 2019, 2020. So even though GPs are a little bit late, joiners to the game, it became a lot more common across GPs to see CFO programs being set up. From our perspective, most of the large, well-established GPs with multi-strategy platforms and a strong track record are now setting up these CFO programs to supplement their fundraising efforts. They will always have regular way LP's in their funds. They will always raise funds in the traditional way, but most of the large GPs will set up these CFO vehicles, which provides the investors basically different entry points into their platform. Some investors will come into the senior, some investors will come through the mezzanine tranches, some investors will come through the levered equity tranches, just expands the invested base of a GP, if that makes sense. From our experience, if a GP has done one CFO, they will do follow one CFOs. Most of the GPs that we work with has done multiple CFOs in the last five or six years. When one of the kind of hotter topics, especially in the private debt, private credit space is insurance capital, and I'm curious, given the role you guys play and all the structures that you help either LPs or GPs with, is there kind of a fear of too much complication, too facturing assets like, you know, we're not that far removed from the GFC, you know, where are maybe some of the risks that come with some of these structures? And is there increased risk, or is the multiple or diversity of entry points, does it help with risk? A couple of ways to answer that, I would say, if you look at, if you roll back the clock and go back like five years ago, it's true that 90 plus percent of our investors have been insurance companies, right? They are the big fixed-in-com players. They have long duration asset, you know, demand, and it's patient capital from that perspective, right? Insurance companies buy and hold and match their, it's patient capital. When you look at the private markets, private markets require patient capital, right? So from that perspective, it's a good match. And because the insurance investors don't require liquidity very frequently, they are more of a buy and hold investors. They like that excess premium they get out of illiquid products like CFOs, right? So from that perspective, it was a good match. And they're sophisticated, they've always been at the front lines of new product developments and what have you. It's just natural that we develop this product with mostly insurance investors. But over time, when the product grows, it's just healthy for us to build a broader investor base. That's why I started going to Canada talking to pension plan investors, I'll talk to like Canadian insurance companies which have a lot of US dollar, long duration US dollar asset demand, visited Asian investors, like Korean investors are active in the space. Taiwanese investors showed interest. Japan is always slow to move. But if and when they like a product, they can be very, very meaningful. I started going to Middle East to talk to them about this new product. So the point I'm trying to make is yes, we did start with mostly insurance company investors. But if you look at our broader investor universe, it's expanded. The bigger growth in our investor base is outside of the insurance space, which I think is healthy. Yeah. When going to follow up on that and some of the newer markets, whether it be Asia or the Middle East. Like what's the best way to approach them with a new product? When trying to explain this, because I presume the CFO product, while you mentioned a bunch that were done by Tomasik, a bunch done by some insurance companies, the GPs that still fairly knew, but like a place like the Middle East or Asia, how customized are they to this product and what does it look like when you say a CFO and they're like huh? Yeah. No, you have to be very patient, let me put it that way. So I think I've visited Asian investors four times already in the last two years. And we haven't actively sold. We did not actively sell to Asian investors yet. So my trips were around, we labeled them as non-theore road shows, basically where we talked about our platform, the new products, the volume, the precedents and what have you. It was more educational and awareness type. Then we started getting some in-bounds from those investors. Like they are very slow, unfortunately, from a due diligence perspective. By the time they complete, we are done and we are on the next stretch. But eventually they're going to get there, similar story with Middle East, there are a lot of alties who are familiar with most of the Western GPs out there. We're just adding a new product layer. And when you explain the CFO product, like this is kind of like a CLO, but the underlying assets are private assets, most people get it right away. But you have to be patient in terms of how quickly they can come up to speed and start about speeding. So in terms of the volatile period that we've seen start the year, it's kind of seemingly has settled down though, you never know the new administration, what announcement can be coming next. I mean, what kind of impact does that have on the CFO market, if any at all, or is the long duration, patient capital kind of move past some of that, you know, day-to-day volatility or quarterly volatility because of the long duration of the assets? Yeah. No, that's a fair question, it's also a little tough question. I mean, we definitely get impacted by the short-term market fluctuations, right? It's both rates and spreads, especially early on after the quality liberation day, you know, balloon quite a bit, which is when we slow down our origination because the pricing would have been a little bit too expensive. But none of our investors went on a risk off mode, so to speak. So right now, and we, you know, we see what's happening in the Middle East, that's obviously not helpful, but again, it's still are still active, they're still looking at our transactions and it's a matter of pricing, but yeah, making sure they're compensated for the potential risk that they're taking on. We haven't seen a risk off mode from our investors yet. How long does it usually take to complete a deal from inception to, you know, when you finish the transaction and then second, kind of a follow-on to that is, what does that look like today versus like 2020, 2021? How much has it evolved in terms of length and, you know, kind of time that it takes to complete one of these? It's getting, it's definitely getting better. We have now investors who are familiar with the product, familiar with our style, they have seen our sales memo. We produce a sales memo, which is loved by the investors in the same exact format. So when they get Project X and Project Y, they look similar, they can easily compare and contrast and like that, all of that education is done at least in the, in the US investors, but it is still a lengthy execution, especially for a first time issuer. We recommend our clients to budget anywhere from three to five months, from start to finish. A good chunk of that amount time is spent on optimizing the portfolio with the types of assets and what have you. And then, and then obviously the ratings process is important, they're, the rating agencies are fairly busy, the legal documentation, yes, we have a lot of precedents, but still there are some changes and unique features that needs to be incorporated. And then if you're marketing equity of the CFO, it tends to last a little bit longer because that's the more labor intensive part of the deal. Yeah, so anywhere from three to five months is what we recommend our clients to budget for. What is the ultimately like when you have it, you know, set up, if you include equity as well, what do the different investor pools look like from top all the way down to the bottom? No, no, that's a good question. So class A's is almost always insurance companies are pension plans, fixing some fixed income side of their of their portfolio managers and they demand is almost limitless on class A's. If that's investment grade, class fees are also investment grade, they're investment grade, but they're not top of the stack, so they they earn about 200 base points premium over a class A, which is attractive and it's a very thin slice, right? So that our class fees are almost always oversubscribed. And usually you would see, you know, the asset managers, hedge fund structure credit investors who are looking at who are also active in CNBS and you know, CLO market, for example. Class C's are subIG transactions, they are at the upper end of the subIG category like double V flat or double V plus, that's fairly attractive right now. They're paying about 800 basis points over US treasuries, like 12% yield is a decent yield, and there's at least 25% cushion equity subordination below the class C's. So usually parts fitted by, you know, hedge funds against structured credit investors, preferred lenders like the like the class C's. And equity has a number of buckets, the managers always retain equity as alignment of interest. Some of their strategic alt fees, especially if they like the manager and they're comfortable with taking on leverage, they can come in through the CFO equity instead of into the fund directly. But family offices like the CFO equity, especially if the family office liked it GP. And if they're comfortable with taking on leverage on their portfolio for any reason, the leverage we have in the CFO vehicle is a lot more patient and sticky and cheaper than the leverage taking get themselves from their own bank or, you know, other lenders. How much would you say is related to, well, a lot of it's obviously related to the mix of the assets, but two, you mentioned a couple of times if they're, if they're comfortable with the GP. How important is that to some of these transactions? Oh, very, very important. Like that's it. I would say number one criteria, but that's why I said, I said in terms of like the GPs with well established, good long track record and a multi strategy platform are the ones who are issuing these views. Because as an investor, you are coming into a vehicle which is making new commitments to funds that are still deploying. Yeah. You have, and those funds have only very little on the ground most of the time. So you, yes, you can look through and do some due diligence on the deployed investments, but you are really relying on the manager's track record, right? So from that perspective, the GP quality is number one criteria. So we have just a few minutes left here and you've answered all the tough questions. Now we're on to more of the fun questions as we as we wrap up here in the next few minutes. So do you have a favorite sports team or favorite hobby? I'll be. I started losing my hobbies long time ago, as you could imagine. The only hobby I have left is cycling, which is also taking a hit this year, given how busy we are. And I bought a guitar for as a Christmas gift to myself and I started playing again after 15 years or so. All right. Well, there you go. Two hobbies there. Well, I guess maybe you might have a different answer to this, but I guess we'll see. Which is one surprising thing about yourself. I don't know how surprising it is, but when I tell people that I spent four years living in Japan in Tokyo, people have surprised a little. It was quite some time ago. My timing was not ideal. I was there in the middle of a financial crisis, but I went there right before and I came back after. But that would be, and I'm sure everybody is recognizing the accent. I am not born and raised in the US. Well, yeah, it doesn't surprise me that you've certainly traveled there. I mean, that must have been quite the tutorial on a financial crisis in Japan. Yeah. I was even funny or not as funny, but I was working for Bear Stearns at the time. One book that you'd recommend reading. Oh, the 48 laws of power by Robert Greens. Amazing book. I read it once. I'm reading it again. And every time I have some feed time, I just randomly open a couple of pages and read it. It's an amazing book. Most exciting part of your job. Ah, that's a tough one. What I love about my job is the fact that we don't do the same thing over and over. Every mandate, every deal has something unique, some new challenge or some improvement that we come up with, which is what makes it interesting for us. And being at the front of a new product that I have the luxury of being that first mover back in the day is also quite nice. You know, there's nothing we haven't thought about or done before. Nothing is new to us in the space. And then when we try something new, we have a very good idea about whether or not it's going to like how it's going to play out. So being in that position is pretty exciting actually as opposed to like, I was going to say, it's got to be pretty gratifying to see kind of where CFOs have kind of taken off, given that you were kind of in on the ground floor. Yeah, no, absolutely, that's, that's a great feeling. Absolutely. And then final question, one prediction for the next 12 months. Oh, that's a tough one. Well, okay, I'll give you a non-answer. We will be a lot more busier in the next 12 months, but who are now? I'll take it. Ahmed, thank you as always for your time. It's been great to chat with you and see you again and you know, for the continued support you've been a very helpful, helpful voice for us on the fund finance event. So thank you very much. Good to see you again. And now we should continue success to you and the team, like, well, thanks, thanks for having me. Of course. Thanks for coming back to the latest episode of the credit closed. We have an exclusive offer for our listeners. Please head to www.docadalyst.io, pick the event you want to attend and enter the promo code credit at checkup. As always, don't forget to follow the show, rate us and leave a review.