Illiquid Assets You Can't Sell? Borrow Against Them - Alex Branton

It's still not as built out as you would think. Where do you go for that loan against your public book? So there is growing demand. What drives that demand? It's both the rise in value, but they can also see liquidity on the horizon. Before we dive in, subscribe to our channel to get notified with new episodes or released. I hope you enjoy. So you have spent a large part of your career working in this world of helping people figure out how to borrow and finance against illiquid assets and let's leave aside real stakes. I think everybody knows how to get mortgage or a HELOC on their house, but other kinds of illiquid assets, whether that's private equity, venture, things like that. So let's say I am somebody with a portfolio of maybe a few million dollars of illiquid assets. What are my options to leverage that from a borrowing perspective? Yeah, so your options are actually surprisingly kind of limited on the illiquid side. So everyone knows where to go, even on the public equity side, large cap, you can go get a long-bod loan or go to a bank. Soon as you're holding kind of a pool of LP stakes or directly, even harder kind of direct stakes in portfolio companies, you go to a bank very often, they'll just have no way of underwriting that. And if they are willing to do it, you'd be surprised. I've seen portfolios at sort of above 100 million dollars where a private bank has been unwilling to kind of do the work to understand what that portfolio is in order to provide a loan against it. And if they do, then it tends to be not particularly cost-effective. Right now, the banks just aren't set up to borrow against private equity funds, certainly not venture funds and direct stakes. So it's surprisingly difficult. And that's the gap that we're trying to fill because people that are lending against these private assets you could probably segment the market into the largest non-banked lenders that are really kind of fueled with insurance money, back leverage themselves that to get out of bed, it's not really worth doing a loan, certainly less than $50 million, usually $100 million plus, banks will play in some areas as well. But why would they do it? They also want sublime business. That means if you're a fund, it's not just a nav loan that they're providing you, you can get as a bank, you can generate money from. Sublime, which is, you know, the fund has commitments and you borrow against that ahead of time to kind of easy liquidity, sometimes juice, iraas, whatever it is, but the bank, that's almost a risk-free way of the bank making money as well. So where there's enough juice to go around, they'll be willing to get out of bed. But if you're anything under really $50 million of nav, you know, that are surprisingly few places you can go and that's the gap that we're trying to fill. Is that consistent on the GP side and the LP side? Or is it different? Characteristics, different lenders. It's a similar group of lenders. GP's also have similar issues. As soon as you get to a size that's below a $50 million borrow, you're also struggling to get a liquidity facility unless you have a broader relationship, again, as a fund. So you probably face a similar issue to being a classic high-net worth as you are being a GP, in many cases, unless it's much larger. But the, I would say, again, the borrowers into those that are focused on the largest buyout funds, which is most of the larger names. So you're kind of the Apollo's of the 17 capitals of the world, managing $5 plus billion funds. You know, again, they're looking for $100, $200 million loans to buyout funds in particular. And then as you go lower, you see kind of mid-market, that's being served by its own group as well. But really, there you're looking at $30 to $50 million, type facilities. And I'd say in terms of cost, a range of sort of 400 basis points or so above a reference rate, so for $7,800, $900 bits over that in that kind of range. And then below that, you're in almost no-man's land, where you have, I guess, players like ourselves that are trying to do it in a thoughtful way, really try to understand what's going on. You have, often, actually, in this space more often than not, you'll have family offices, friends that will actually provide the loans to each other. It's that level, really, as opposed to being truly institutionalized. Banks like Silicon Valley Bank used to do a little bit more of this than they do less of it now on the tech side. But it's very inefficient. And so should we just wrap up this call then? Is there no answer? Or what does it look like? So is it a much thinner market? But what are the options, again, as you get down there? Yeah, so the options, really, just for liquidity, full stop, I think it's worth taking a step back. OK, you've got, say, a $10 million private book, and you need, let's say, $3 million. Your option one is to often is to go and try to seek secondary liquidity in those. If it's a fund, if you're a buyout fund, you might be able to sell that. Those sizes tricky, again, but say $0.90 on the dollar or something. Below that, there's a variation of, say, maybe $0.60 to $0.80 on the dollar that you might get for that. So it's pretty expensive to sell something on the secondary market that's growing. And then when it comes in-- so really, the second option for people, if they haven't gone through, this is to go to someone like me. And they find me, really, by-- we've set our stall pretty clearly for a certain size in the market. So really, you're looking at a non-backed lender. You're coming to someone like me, where if you're the heavily diversified portfolio, you might be getting 4, 450 basis points above a reference rate for up to a 30% LTV. If you want a very, very diversified book of L.P. stakes, it may go up to 40%, 50%. But it's very rare that we do that. So your options are come to a non-banked NAV lender like myself. Most of us will be providing somewhere between a 10 and a 30% LTV facility. It's going to price somewhere between 450 basis points to 700 plus. If you've got any concentration in there, you could see that going north, significantly north of 700, or even kind of a fixed rate in up to the mid-teens, really. But I'd say the majority fit in that 450 to 700. So you have options, but they are limited. And you need, I guess, a specialist that will be willing to do the work to understand it. So that's how I characterize it. And now, those are not the most attractive of loan terms. So can you walk us through? Why would somebody has to be fairly successful and fairly well off to put together a book of, as they're saying, $10 million of private market investments? What is the motivation for that person to say, yeah, I'm going to borrow $3 million at a 10% interest rate? What kind of needs or situation typically rises there? Yeah. So in terms of why-- maybe I'll start with why the cost is compared to what? So I guess people anchor themselves often to the margin, lo and that might be as low as 1% over a reference rate. But there you're talking about really stringent terms, kind of highly liquid, large cap often, and so for a bank, relatively little risk. What you're looking at here is an idiosyncratic book of illiquid assets where the repayment is uncertain. There's quite a lot of underwriting, monitoring, involved there. So the cost of capital is just inherently a little bit higher. In terms of why someone would take it, and if you could give a couple of examples, it's really what is the real cost? If you need capital and you have a pretty-- in maybe in some case, you've already levered your public book, but let's just say you have an operating company. You have a bunch of very strong private investments that you just have. You just have an illiquid book. If you need liquidity for whatever reason, whether that's lifestyle, or actually more often, the not the deals we like are, I have an opportunity to buy out my business partner, have an opportunity to buy distressed secondary, or whatever it might be. You have to weigh up the cost. Is the cost of selling your portfolio at a 30%, 40% discount that's growing-- a portfolio that's growing 20% a year, more expensive than getting even a level 8% to 10% per annum facility against that in the short run? And maybe even in many cases, the time horizon is usually around three years, is probably the average. So usually people are doing it ahead of some form of liquidity event, so they conceptualize it in that way. It's like, OK, this is a bridge to something. Or I don't want to destroy value permanently, and that's the way of doing it. And so coming back to these spreads, which I agree, they seem to be wider than you'd think, given what you mentioned, of like a 10% to 30% LTV. I mean, maybe you can touch on what the loss ratio is actually look like. I would imagine that they're very low, and that cost of capital peace. I get why they're more expensive than typical clutch asset line. But to a certain extent, if your loss ratios are super low, I wonder how much of that is really driven by cost of capital, where maybe the collateral isn't sellable. It's too small for the secondary's market. So if you actually had to take that collateral, you're just stuck holding it. Is that the issue that's driving the spreads, or is it really just a lack of supply in the market, and so you can be a price taker? I think there is an element of being a price taker here. But it's also the extension risk here is the real thing. So in terms of how we've done and actually our partners, as well, that have collectively, the piece of our 90 transactions, only one has led to a case of enforcement, and we can go into what that looks like. but there is going to several more that have resulted in kind of extensions. of some form like far beyond that. And you're certainly running the risk that depending on the concentration that you could be left with these assets, if we haven't done our job for much longer than the tenor that we look at. But it's a relatively low loss ratio in terms of its correlation with direct lending. It actually sits aside its own asset class in many ways, 0.3 type correlation with it. So it's a form of private credit that's pretty dislocated. And I think that on our side really, frankly, it's driven by what my investors are willing to get out of bed to do to a certain degree. And then which is that and myself. And then that just is we can dictate that price to a certain degree. That said, I would say there is a certain part of the market. And it's not so much the-- so right now the pricing is all over the place, really, for the individual looking for a facility, for a buyout fund, or for a kind of a mid-market private activity of any scale, you do see major competition there. And really that they run very competitive processes. They margins there are really converging, I would say. And the race there with the largest players is really to get cheaper capital. And so they're getting rated, getting some of these deals rated, they're creating rated feeders for the vehicles. They are trying to tap insurance money anyway to kind of-- as the prices come down, maintain some form of profit margin on their own guard. But our part of the market hasn't really faced that as of yet. And it tends to be-- if markets were perfectly efficient, and you could sell out of things within the time required to do what you need to do with a capital at a minimal discount, would there be as much of a need for what we're doing? Maybe not. But we have situations where a family will come to us, let's say, with a recent example, $400 million portfolio, they had a very early investor in a tech company that he's doing extremely well. They have their pro-rata. And it's simply a case of, OK, Alex is giving me capital at 10% fantastic. What they've done with that capital now, I've seen it's 10x. So it's just-- and they did that on the basis of the value that had already increased pretty significantly. And from our perspective, it wasn't a single asset. There was a real significant boot collateral there as well. So even if that single asset had collapsed, it's kind of that's the deal we like. It's people that like their portfolios, they want to do something accretive, and this is the-- they deen this to be the best option. And so in terms of the collateral people are providing, it sounds like it's not single asset. It's diversified. Are they also putting personal guarantees on top of that? Or is that part of the reason I'm willing to pay more? Yeah, very rarely. No, non-recourse. It's just what's in that pool. So what tends to happen is if the assets are held in someone's name personally, they get put into kind of a hold code or an SBV that is created. And then we get a pledge of that, the hold co-equity there. And so sometimes there might be, say, if you're an entrepreneur, royalty payments that come in as well. And so we might have control of an account there that comes in and the excess is distributed back. So there's different levels of control, depending on what it is. But ultimately, it's only the pledged assets that we're dealing with. And that goes to zero. We're zeroed out as well in that way. And so in some instances, we are taking on kind of real, real risk here if we've got our work incorrect. But you mentioned in the prior facility, boot collateral, is that just a typical? And for maybe listeners here, boot collateral is just additional collateral on top of the primary security that you have. Is that just because they needed more capital than your underwriting LTP would support or something else? Yeah, I think it reduces the cost of capital as well. But basically, the more diversified, the bigger, the more that we're covered. I like to have a certain amount of coverage from the assets that are not in the concentrated part of the portfolio, just the way that we underwrite. So in that case, it just brought down the cost of capital by having the broader pool. And if somebody's interested in this from a borrower perspective, what is-- you've mentioned some very large numbers. Hey, if you're into the hundreds of millions or billions of dollar portfolio, you've got a lot of options. And it's narrow as you get smaller. How small can one get before you're saying, hey, this is not relevant to any lender? Like you can't borrow off $100,000 portfolio. But where is that? Yeah. It's a really good question. I would say the low of $5 million land, you're in a world of one-man band kind of shops that are probably backed by a family office that are providing loans, so to say themselves. Or you're in that world, really. You may in some instances, if you're some banks that have a relationship with your fund and your GP or something, you may be able to get some exception. But generally speaking, there are very few to no options. At the 5 to 15-- And that would mean a $15 million portfolio is what you would need to support their $5 million dollar amount. Yeah, roughly something like that. But so from my perspective, we really go down to 10 is really what we do. But I'm actually putting together a portfolio at the moment just to tap that part of the market because it's such a-- people-- it breaks my heart sometimes. People come, they've got fantastic portfolio. But it's kind of whatever, $15 million, top private equity funds, whatever it might be, with the zero options. And it would be an easy credit for me to underwrite. But doing that in a scalable way. And part of the reason here as well is that the legals on these are not. These are not necessarily cheap transactions to do as well. There's quite a bit of works often moving some of these stakes into a hold code, in many cases. And so at the lower end of the market, you get more point of boilerplate. And so it just needs to be very simple, very easy to understand, preferably a pool of LP stakes that you can just flip into an SPV and lend against that, very simple boilerplate terms. Because these things can get expensive if there's any complexity at all. And what is that? The people who are lending, I would think, well, how much of the cost and the complexity here is the underwriting versus this other legal kind of stuff. Because you could imagine the kind of investor who's looking at equity positions in this, when I'd say, hey, I've already underwritten blue, owl, and gollub, and KKR. And so if I know them from an LP position, I can lend against it and be pretty confident of 30% LTV against KKR. There's no world in which I'm losing money there. So that doesn't seem that hard. Yeah. Can you break that down a bit more, what makes it more costly than you might think? Yeah, for short, look, if you've got a book of the times and navens that you mentioned there, you'll be at the right at the end of that range, the bottom of that range that I mentioned in terms of the cost of capital in your rights. It's a pretty easy-- it's a pretty easy underwrite. You can trust the statements, the navs, a fairly legit. You can really get in there. You can trust the GP. It's a pretty easy underwriting. In that regard, there are-- yeah, there's limited less value, I say, in the underwrite to a certain degree, and then there's some legal complexity. But that's a pretty easy-- there's a minority of transactions that I see. I will see someone that comes to me goes, look, I've got-- so and so royalties that come in every year. I have real estate in Dubai and somewhere in Eastern Europe. I've got these direct companies of which-- some of them are mine, some of them are control, some of them are minority. There is a meaningful amount of underwriting here. And if you get that wrong, your 30% LTV can be 100% LTV very, very quickly. So there is some meaningful underwrite. And then we try to-- if I can't add some value on the underwrite, it's very rare that that would be a deal that I do. And I know the perfect situation is that the companies that I've seen before as well. But yeah, if you're in KKR, pull of-- again, I've been amazed at people with much, much larger portfolios with names of that, how they've really struggled to get facilities even then, just the way the market is set up. And so how much of what you do is pure LP collateral. Like all the examples you just gave, I've got a partnership stake in a whole co, and then I've got real estate in Dubai, et cetera. Are your collateral pools, I guess the primary drivers LP stakes, but then they are going to have a lot of other collateral in them, or are they still primarily driven by LP stakes? It's a real mixture. So certainly not just LP stakes. I'd say it's usually, I say, on average, it's like a third LP stakes. And they're not a third direct companies and a third other, I would describe it, something along those lines. I see a lot of-- the portfolios I struggle really struggle to underwrite are. And I see a lot of them are early stage pools of early stage companies, or even growth companies. It's quite-- where the reason that that's so tough is often an entrepreneur is coming to me or an investor that has a very deep connection to the founder, or founders in that portfolio pool. And I have to look at things for what they are, and look at the downsides as a lender. And if an founder might be fantastic, but if I'm seeing something that's, OK, approaching a period of narrowing losses, but still reliant on something magical happening in the future, it's tough for me to underwrite that. So that's the situation. The reason I bring that up is that often there'll be a portion of the portfolio that I just say, look, that's zero from my perspective as well. And so they may come to me with more. Let's go look, that's zero. That's zero. Very broad strokes. The LP stakes, that's pretty easy for me to underwrite, OK, these companies, you've got control positions. They seem to be profitable or whatever it might be. I can really get my teeth into that. In some instances, people come to us without kind of formal valuations for either certain their own companies or. sometimes other assets as well. We'll try and work with them on something that's sensible as well. So we try to do the work because obviously if you are an individual that comes to us, you haven't necessarily got everything as you would a fund. So some complexity in there usually. And I would imagine, correct me if I'm wrong, that the borrowing price reflects the complexity of these assets. So again, if it's all blue chip LP positions, probably diversified, I'm going to have a lower rate. How far out on the other end of the spectrum will you go? We say, OK, there's this land in Slovakia and dodgy stuff going on Dubai. But if you'll borrow at 25%, I'm going to take the risk there. Does it become more of that high-risk high return? Or is this world still in the pretty tightly managed risk? I think that-- so the way that we see it is, there are three buckets of which the first two are the vast majority of what we do. First bucket is, let's say, the classic LP stake book, names we know, whatever it is, lowest cost of capital. There's then the next bucket that I would call. There's some direct names in there. It might be a little bit of concentration. It's nothing. It's still-- you can wrap your head around it and it's understandable, but there's certainly requires some complexity, some underwriting. Above that, I would start calling it a special situation. And there you have equity cost of capital. And so that's where my family offices that go look to take any real meaningful risk here. You move from it being debt to equity. At some point, you're taking equity risk. You're not a lender anymore, at which point the cost of capital jumps up to mid-20s very quickly. And you're getting most of that to be fair from some kind of profit share element of it, most likely as well. But you can go out. I've seen 18% picks, 25% profit shares, also skies the limit. So that's really start getting into a special situation. And then again, it's not like you're underwriting anything necessarily incorrectly. But so there's one way we're looking at. But we looked at very clearly that was about 90% concentration, for example, into a single company. There's no other way for me looking at that, given that going into the dynamics of it, anything other than really an equity investment of sorts. So I will-- I can do it. OK, we'll do a 40% LTV. It'll have a preferred return on it. It will have that. But it's a different pool of capital on my side. It's like a real special situation. And those tend to arise from my day-to-day work, just finding pretty-- try to find fairly boring. Some complexity to it. But down the fairway type nav loans, every now and again, something will look and feel like equity risk. And at that point, we have some family office that love that kind of thing. And we will underwrite it. And in some instances, they get funded. But it's-- yeah, there's definitely where you really are, London, when you start being something in between, and really equity risk. You can fall into that very quickly if you're not disciplined. And so speaking of the terms and structure of these loans, how are they set up? You mentioned before picking, I would almost imagine that's the default, right? Yeah. That they're not actually paying monthly interest payments now. How is it built out from there? Do you have a lock box on distributions? And so anything that's picked then immediately comes on a preferred basis out of distributions? Is it all just built into the backend? What kind of terms are you looking at? Those types of things? Are these all-term facilities? Or do you have some revolvers based on some other things? Do any of them have commitments left in? I know I've got a lot there. But what type of structure are you typically building in here? Yeah. So I'd say not no revolvers on our side just because we're set up as a fund and it's kind of expensive for us to provision that capital. Sometimes with the larger facilities we'll do kind of a delayed draw. I'll get onto the other sides as well, but typically speaking, it's all taken up front, just the way that it works on our side. In terms of, so these are your pledge over the, so whatever the assets that are being kind of put into the box here, tend to be put under a single holding company that we have some control over in a default situation. Often there will be, there would certainly be some oversight of an account to which distributions would come into. In terms of how much is swept into there, that's kind of negotiated. Often there's kind of a holiday for a couple of years or whatever it is in order. And you come up with a sensible arrangement, but then beyond a certain point, it might be a certain percent of the cash that comes in from distributions, dividends, whatever it might be. We're going to that account to pay back whatever the agreed amount is and then the surplus goes back to the, goes back to the borrower and there are kind of exceptions for things like tax or whatever else it might mean that we don't want to trip anything up on that side. But working on one at the moment where there are cash pay facilities as well, with quarterly quarterly as well and then that instance as well, like the cash will come into an account that we have oversight of and then really the excess goes back to the borrower. So there are different levels of security, but we try to make it, a lot of these facilities are heavily bespoke and dependent on what's expected to happen on the underlying, but yeah, you're right, the default is pick as a 90% plus pick. Yeah. Matt, I actually have a question for you here because Alex was talking, he was saying some of these verge more into the, okay, an early employee at this company has 20 million dollars of shares and then people bar against that. That's something that we have seen as its own asset class as potential investments. And then of course, as you look at things like real estate, there's a whole world of real estate lending, whether that's personal or commercial. That strikes me the way Alex is talking about, a lot of these are basically, they're bespoke and things that don't fall into one of these established categories, but it's kind of, in the edges outside those boxes. We're, I'm curious since you see a lot of these, Matt, where do you see as the kind of gaps in this market where it doesn't kind of fit into one of these other boxes? Well, some of this conversation is somewhat interesting where I was thinking the same thing of this almost feels like a bespoke family office sort of under relationship. And so like throw your mismatch of stuff against the wall and we'll figure it out because if it's just real estate we're talking about, like that's a really built out marketplace. Like I don't know Alex not speaking for you, but I'd be surprised if somebody's coming to you and they're like, Hey, I've got all this, you know, Dubai real estate. I really need a solution. Like there's such a almost commoditized lending space for that. Unless you're junior in that sense, unless you're like, you know, very junior, very subordinated. Yeah, pure. Sure. And then, you know, Tad, I mean, I'm sure, you know, all of our members that have $100 million in SpaceX shares, the, you know, old Silicon Valley banks of the world like or whoever they're working with now, I'm sure that they have some sort of solution in place. Or there's GPs like Alex that this is all they do, right? And they have, you know, full on funnels that are meant towards employees like this. But it's more of this grab bag of solutions against that specialty piece of the core LP financing where it becomes a lot more unique and bespoke to this situation and where Alex specializes. And it's, you know, it's fascinating. You bring up SpaceX, but I'd say SpaceX, I've seen in about 50% of the deal flow I've seen this year in terms of portfolios. So I think people are also thinking about it in terms of the kind of, you know, taking some capital out right before they've still got some lock up in there as well. Do you risk a little bit? Take some capital out. But yeah, I've seen that. I've seen SpaceX a lot. It's a difficult one to underwrite as a lender because just because you the variation in valuation. But do you struggle with 100 times revenue? What's it now? I think it's about. And so actually, I'm curious then how you see this evolve because again, like, you know, as Matt and I were saying here, we see in that example of, you know, pure pre IPO companies, I feel like that mark has become much more mature over the past few years where there are these more established lenders and they have their own diversification funnel. So I'm part an anthropic and part in SpaceX and part in open AI, etc. And so there's kind of other ways to make it more efficient. How are you seeing this, you know, I grabbed bag markets the wrong way to phrase it. But, you know, the space that you plan, which is a little bit of everything. How has that been evolving over the past few years? And in which sense, in the sense of kind of just the, I guess do you see, you know, more, is there more demand from borrowers coming up? Is there are you getting more direct competitors and more supply coming on or is some of this becoming more standardized? Hey, there's a template contract for this and template terms and just kind of, you know, generally becoming a more mature industry. Okay. Yeah, I got it. I mean, this industry is kind of popped up from, we know over the last 10 years and owning the last around COVID, kind of meaningfully grew. Actually, a lot of this came from Europe originally with the likes of 17 capital. In terms of the demand, I guess for me, it was really a finding kind of where do I fit in the market full, full stock. Hey, you know, I started my career. It came just so you could advise and kind of very, very large kind of family offices and kind of worked in direct private equity. And so it made some mid to small size kind of private equity. And so I always saw the gap at the lower end of the market on the family office side that would be being underserved and also the small to mid size private equity funds. And so that's from the outset that was where I was going to settle in, but it's taken a while for me to find where I feel like there's the gap in the market there. In terms of demand, it's a really good, good question. I mean, there's a lot of people that I wouldn't say there's very far from a system systematic use of these facilities. If you're coming to me, you've usually got a pretty good reason for wanting capital. And so for me, it's about being kind of visible as and when people need that capital. And as to what the market is now, so there's been a huge run up in valuations in tech in particular. And so a lot of people are like, look, I've 100x to my, whatever company it is. But again, that's an unrealized valuation. And most of my underwriting is like, OK, I've seen companies that, again, on a known-known basis that are kind of valued in the hundreds of billions. And then actually, barely trade in some regards. And so I'm trying to find out what is this actually? What is the actual market price for some of this stuff? And for me, there's a lot of demand for the likes of people with SpaceX or really kind of well valued, you know, whatever the open eyes of the world, for example, that are 80, 90% of a portfolio, or maybe in some cases less. And it's really tough for me. So there's what there's demand for that with my lenders hat on. I just, maybe I'm overly, overly cautious with it, but I just don't know how to value that in a down, down case, the downside scenario. So where there's actually demand, I can't often can't supply it. I would say, and actually, you'd be surprised you give SpaceX as an example as well. The amount of people that come to me having failed to get facilities against SpaceX. And we're talking about people with $100 million of, you know, all the way from what a five to $100 million, some of it is held through kind of funky SBB structures, fair enough. I'd say most of it actually in that regard with, you know, that that adds a level of complexity to it. Maybe that's why they're having a challenge with it. But I, yeah, you're still not as built out as you would think, you know, where do you go for that loan against your public book? And people, I think, again, what, what, what drives that demand? So they know, okay, this thing's not going to be outstanding for 10 years. And that's what we want as well. We want to, you know, to do the do facilities that you want to five years, average three years. So meaningful value growing. Don't ideally, they don't want to sell the asset. They really do want to hold it and see this as a creative capital. But they also see liquidity come. So if you're in SpaceX, whatever it might be, it's like, okay, my lock up expires in X number of months. So I'll be able to pay Alex back. And in the meantime, I'll buy more of Anthropic, whatever it might be. And you know, if we think about the supply demand balance, lenders and borrowers here, maybe just using your businesses example, what is the gating factor for you? Is it finding enough capital that's willing to make these loans? Or is it finding enough, you know, appropriate borrowers? Finding enough appropriate borrowers is definitely the the the challenge. And that's the, it's the origination and the underwriting is where the skill of this is. There's actually quite a lot of capital if it's structured in the right way. Almost to the point where I think there is so much capital chasing it, the managers that are doing it have become so large that they can't service the small, the smaller kind of shops it in that way. It actually, even to ourselves, in order to bring the cost of capital down and do this effectively, we have private capital, private credit backers that provide the majority of our capital in order to do this. And they see us as an effective way of distributing that out to the smaller end of the market as well. But I would say, I mean, of the say, this, I think this, this year, it seems sort of 150 deals of which, you know, you can 75 or so, you can throw away immediately for various different reasons, venture portfolios of like pools of minority stakes in companies that are not profitable again. It's just super tough to do it. And then so you're left really with an in our case around 20 transactions there that are kind of usually hopefully diversified some names in there that we know financials that we can kind of understand. Maybe some complexity, but not so much that we can't get comfortable with it. And we can, you know, can not underwrite those, you know, term sheets within two weeks and then probably times of money usually kind of average about two months from start to finish. There's some complexity after the term sheet stage, but I would say time time again, if for me, it's kind of high quality origination is the key to this. And so did I hear correctly that like a core piece of your LP base is essentially, I don't know, you could either call it fund of funds or coGP relationships with other private credit offerings where they're just trying to take the tail of the market that isn't scalable for them to do and they're just basically outsourcing it to you. Yeah. And the reason for that on my side is that so I have, we're backed by a family office called LaPurk. We are, we have family offices that invest through us, but their cost of capital effectively in order to do this at the rates that we mentioned there. It's just, it's too expensive effectively. The reason being is that the private credit, the larger you get, the more access you have yourself to back leverage bank credit. So when I say banks don't do nav lending, they do often lend to the nav lenders. And so they're buying effectively a book of nav loan. So if you're a nav lender, you might be getting leverage from a banker much below what we are, what I've mentioned there. And so they can only do that at scale. And so then I can get a portion of that scaled capital and kind of offer similar, similar terms to the smaller base, whereas I find doing a $10 million nav facility. There's no bank, very few banks that would offer me any sort of back leverage on that in order to get it the cost of capital down to the end, yeah, the end user and so off for something interesting. If that makes sense, there's just the larger you go, the more complex you can add to the your funding base. And yeah. And so yeah, maybe talking a little bit more about how you are structured than your LP base. This is a drawdown fund. So we so no, we primarily invest directly out of the private credit funds that that back us. So we have a pool within there. And we will take things like full underwriting to them. And basically they they sign it off and release the capital. And then we will pull our LP capital sometimes. So we get full economics on that in terms of management fee and carried interest. But we will sometimes bring our own capital and that's family office about five families that we have primarily that will create a vehicle to run alongside that too for the larger transactions to go in. And also any special situations we will create a single, a single so deal by deal special situations. They're just aren't enough to justify a fund. But the reason I say that we're going to target the smaller side of the market is that it's likely at the end of this year or early next year, one of these funds seats a vehicle that is kind of fully discretionary in order for us to tackle the smaller, kind of more of a boilerplate template in order to do that effectively, but go down to the five million or so. But in the interim that we want to we're just getting deals done really between ten and 30 million dollars is the kind of average at the moment. It's the most efficient way of doing it without just blowing the cost of capital way up, which is kind of what we saw earlier on. And then if you just want to invest family office capital into the strategy on our side, you're looking at again, really it's more of a special situation, strategy than kind of a more repeatable now-blending at affordable rates. And you know, one thing that's interesting to me is I see how it would be very costly for, you know, somebody like you or anyone else to be underwriting if you come with a portfolio and want to be diversified, well then that also your multiplying the amount of underwriting you need to do. Now you need to underwrite, you know, ten or twenty different positions, look all their cash flows. You would think there would be a efficiency opportunity here for the GPs, especially when it's running a bigger fund where they basically know their book, they trust their book, you know, maybe they've got private credit lenders who know their book well and have done detailed underwriting. Is there a lot or if there's not, why isn't there more of kind of GP facilitated, you know, lending actions against, you know, so again, if I'm an investor in KKR, I'm kind of facilitating, hey, I've done all diligence with Goldman and they'll lend to you at, you know, this kind of rate as they ignore a book. Yeah, I mean, I guess in some instances from, I haven't seen it particularly, in some instances if there's a private credit arm to a similar, you know, a similar shop where they may be able to provide facilities against it. I, again, I, especially at the smaller end of the market, see nothing very, very limited kind of options, limited options there, but I guess was the question slightly different. So what are the GP? I'm just kind of curious if that exists or, you know, if not, it seems like it ought to exist, you know, why, why, you know, capitalism does not believe this profit on the table. In the same way you mean as to call GP off, like facilitating a secondary almost for their LPs, offering facility. Yeah, I think that I haven't seen it today, but I'm sure the very, very largest funds to their very largest LPs will, you know, have relationships with banks that they'll do that, but they themselves offering it. I haven't, I haven't seen it, but I guess there is potentially, I'm trying to think in terms of conflict of interest there, but they feel like, yeah, if the GP themselves is starting somehow lending in order for them to re-up into funds or whatever it might be, ends up probably getting problematic, but that I wouldn't put it past some of the larger names. Yeah, I mean, I don't know, I'm kind of, I think it's an interesting thought experiment or idea, right? Because so many of these private equity firms out there are, they run direct lending or other nav lending businesses, and they're all doing club deals together on the direct lending side. So they're the closest to the underwriting, like I could definitely see a world where Apollo's like, hey, part of our theme. product is we'll give you a 20% LTV on any of these top 50 PE positions or whatever. And it's basically like the click of a button on a templatized form and then you know, spits out your money to bring the cost capital super low. Now I wouldn't that wouldn't compete with what you're doing because you're doing. Yeah, I spoke, but it is an interesting question of why that doesn't exist. I think so, I mean, that's an interesting question. I mean, the other one is, you know, wealth management platforms make sense to, you know, add some kind of lending product there or actually have someone like myself distribute, you know, capital to them in order to service their own investors. And I get that a lot. So one of the issues on the, for example, wealth management side is that where you, because it's it's it's again, it's it's all down to size. As soon as you get again, definitely if you're a KKR or one of the names you mentioned, they're again, so are they getting out of bed to do anything other than, you know, under kind of a hundred million dollars, but you're right, it's an opportunity there. When it comes to the wealth management side is something I'd like to look at as well as where, you know, LPs are going into a single, so multiple investors are going in a single LPs into funds or whatever it might be. And they're kind of individually are 10 million, 5 million, whatever it is. There's an opportunity there and potentially to work with that structure to offer those LPs in that in that vehicle, some kind of facility if they would like it, but it tends to be a different LP base for each different structure, whatever it might be. And you can't cross collateralize them. So it's difficult to build a bigger, a big enough pool again to lend again. So it's often it's the size issue you keep running up against this, this part of the market. And whoever can crack that and it's something I would like to explore more and more. I mean, there's a huge opportunity there. If you can do it in a scalable way, but at the moment you're in a situation where, yeah, there's big capital involved here that's searching for larger and larger deals. And actually, many instances, the larger the deal, the more hair they're probably willing to take on some of these transactions because of the complexity, willing to do it. Legal fields are legal fees are fairly substantial for various reasons. If you want proper security, moving things into a vehicle, whatever it might be, I think that efficiency needs to come to this and it will, and certainly we'll keep looking at at ways to kind of make this more efficient. But there is a part of the market that's continues to be underserved. I see portfolio is still to me. It's kind of almost a mystery sometimes as to, it may be me that they haven't been able to go to a bank, or whatever it is, just not set up to deal with it for whatever reason. And you know, in terms of, from a lender's point of view, when these deals go wrong, if I heard you correctly, it was mostly from a 10 year perspective, not an absolute lost perspective. Did we get that right? Yeah, you did. And that's more like a more function of, you know, if we're doing kind of anything above 30% LTV, you're talking about often books of 10, 15, 20 kind of lines of LP stakes that are fairly diversified. So quite a lot needs to go wrong to trip a covenant, which would usually be the LTV creeping up beyond a certain point at which, you know, long before that, you'd have a conversation. And then there'd be a cure period. But and what does happen? Let's say everything, you know, they can go wrong. It does go wrong. You know, what what a situation look like that. So a situation where so covenant sort of like various situations of the LTV is risen, say a scenario, whereas 20% they're 30% LTV and it's a 70%. So 70% residual value somehow. I was one company went to zero. So suddenly you're in a kind of a default situation. There was a long cure period. No value was realized. There was no ability to put more cash into that into that pool. And you really did get to a situation of a default. Then the lender would be able to come in and sell whatever that asset would be to reclaim whatever value they could in a recovery situation. But again, these things are so conservative. Generally, I say the average is again, 20, but against pre-diversified portfolios quite a lot. Needs to go wrong and there's a long, a long way to go before you get to a situation where there's a hard kind of enforcement type type situation. But that is in theory, what would happen? And often it would be, you wouldn't be out. You wouldn't go down to your 30% you probably, you know, it would be an inability to bring it back below, you know, 60% or 65% or something like that over a period of time. So there'd be enough capital to go in there. But there's usually multiple ways. I mean, when we look at this, we look for four ways out of this trade. There's kind of DPI to come. There's liquidity in the LB secondaries. There's a way of refinancing out of it. There's multiple ways, you know, in a situation there and then so many steps to happen before it. So I think if you start seeing lenders going, you know, to fairly concentrated portfolios above, you know, 50% in venture, whatever else, you know, in the market where, you know, we all know what happens around. Com 70% draw downs, whatever else. Like then you can be a situation where it happens fairly kind of, but I see pretty rigorous under right across the industry. In Nav lending, it's pretty conservative. Still, I don't see any kind of competitive laxity in that in that regard. And so, and I mean, you could argue as well, it hasn't really been through a proper as a lot of direct lending hasn't, you know, it's just different asset class. But a lot of this stuff hasn't been through a full cycle. So let's let's see it. But I think of all the things here. I think this one's pretty well insulated from an equity buffer standpoint. And so then I heard you say about your exit optionality there. Are you taking portfolios where you might not have an exit offer? Or is that kind of one of your hard? Yeah. No, because I, yeah. So how does that work then? Because like, I guess coming in one of my questions was, all right, say you're making a $10 million loan on a $30 million portfolio. That $30 million portfolio has $31 million positions. I guess I just would have guessed you wouldn't have been able to actually take a secondary out on a billion dollar. Yeah, all the second year of the whole code. So just sell the whole batch. And then you have broker. That's, that's an ad. It's like, yes, I'm more active market than the one million. Yeah. And as I say, that would be at the lower, lower end of what we do as well in terms of size. But it's a major concern. I mean, we, particularly on the minority direct minority stake side, you have to look, you know, in reality, how much flexibility would you have to sell some of these positions, not, not much. And so a lot of work goes into really finding comparables. If it's anything, you know, other active broker market in some of these positions, really working out of things of trading, what is the real price as well? Because we haven't discussed it much, but obviously what does Nath mean is a big, is a big question, right? A lot of people come to me as, now, as if it's cash in the bank and, you know, depending on what the asset is, that can be more true than, than other times. But I mean, I mean, yeah, I think that's an important question well beyond just, this particular scope of lending is something LPs are asking all the time. Do you have a, I don't know, hot take framework on how close, how far off you think Nave is, or the kinds of asset classes where it's more truly representative and not. And can you just kind of free-road? I mean, not to make light of the underwriting you do, but can't you just kind of free-road off of the secondary market? Like, look, they're pricing this at 78 cents, so I'm pricing it at 78 cents, and then I'm basing my LTV off of that. And if there is no secondary market for it, then you're not going to price it. Like, I don't know. There's definitely, there's definitely, I mean, there are plenty of situations where there isn't the secondary market, so you have to do going to go back to basics, but it definitely helps in terms of pricing. And it also just when you go back and forth with the borrower saying, look, this thing is trading at trading at X. But even then, even if it's trading at X, you have to make a judgment course because a hot secondary position in venture companies trading at whatever we can still, how do we get comfortable with it? But in terms of what the real nav is, I mean, I've worked on, I've been on the LP side, the GP side, and I see what goes into these navs. So I'd say that for the most part, it really is, but it's a bit kind of obvious, but the larger name GPs with the more rigorous valuation policies, whatever else you can free-ride on that a little bit. And that's why it's cheaper and easier and easier to do. But I will frequently see now even the similar, the same company being marked wildly different between two different funds. And then you're trying to find the truth of really what it is. And so you may look at comparable transactions if there's nothing in that company, you will take into consideration, if I'm working with a fund in particular, do they have control position in that, which might suggest some more ability to affect an X. And if it ever came to it, but you'll write it. Yeah, maybe. Just to dig in though, that's really curious to hear that, you know, I get why there may be systematic incentives, why somebody wants to mark up or down their portfolio, probably more likely up. But hearing those different prices for the same portfolio, Port Co, across different owners, can you double-click on that? Like what do you think is driving those different numbers? Yeah, so where would be a situation where that would happen? Someone, something you'll hear from a manager quite frequently will be, we're very conservative. We hold a position at the last funded round or whatever it is. And you look into that in this 2021. And so surprise, surprise, it's like, you know, higher than you speak to someone else to look with actually using this. We've got really reasonable comparables here, certain multiples and they bring it up and down with whatever the public market equivalent is. So you have just two different, completely different policies in theory, both are allowed to do it. As to the driver as to why that happens, it's almost always the optics. Just, you know, both of them have not, both of them don't represent DPI. They're unrealised value, you know, as much as people, depending on how sophisticated the RP base is, but it just looks better right if you're holding something. thing at twice the multiple when you're fundraising. So I think it's driven by, I think ultimately people think, well, the proof is in the pudding here anyway, it's like DPI is the only thing that actually matters. But in the interim, I've got this unrealized IRR says 25%, not 18%. Yeah, I'm within my valuation policies, rules, to be able to do that. This huge discretion as to how these things are actually marked within it. And I've seen, you know, I've been part of those audited processes before, you know, the GP effectively hands what they think it should be. In many instances, certainly in the ventricide for various reasons to the auditor, and they just, they just, they just take it and the best GPs, I think, you know, when you enter a GP and you do, do, do, do, do, do, do, do, do, do, do, do, do, do, do, do, and you see how they value things, the best GPs are pretty sensible, I'd say across the board as well. And again, they, they track cheaper pricing, more, more funding options, everything else that comes with it. But it's, it's, it's certainly a, yeah, there's less rigorous rules than, than other parts of the markets. And do you see me patterns like are the bigger GPs more likely to take a, you know, a lower valuation or more conservative valuation, or are there any other patterns that you tend to see like that? I find very few people are kind of ultra ultra conservative in the sense of this is, you know, I don't know, going out of their way to kind of give the most, the lowest valuation they possibly can. But I'd say the larger GPs on average, probably pretty, there are some exceptions here, by the way. But I'd say in private equity land with the limited partnership. I find the larger GPs, I think they have to pressure from their, from their LPs themselves are sophisticated enough to really look into the portfolio and, and question things. So as to whether it's driven by themselves or whether it's driven by pressure from their LP basis, the other is the other side. But I mean, you have secondary funds that I'll work with as well, where, you know, this raises an interesting question about value versus price, where you'll have something bought. I mean, making it up and say something was bought at 50% to the last price and they're marking it the next day, especially in another green vehicle at 100%. What is the right price? Are you, is it, I mean, they would argue that, you know, really that that is the complete the that liquidity value that ability to get that structural will alpha, whatever you might call it that means that the price is still 100%. They just managed to do it through whatever else mechanics, but that's that's the sort of thing you have to grapple with and actually in this day and age with more evergreen structures more generally as a, as an LP in it, you have to suddenly nav matters in a way it didn't before really so when does now really matters matters when you want to borrow against it. And it matters when you're buying and selling in at nav ultimately, outside of that, a traditional limited partnership, it matters less because why you're guessing secondaries it matters as well, but other than that, everyone knows you're kind of waiting for DPI ultimately that's the thing to guide, but it's not, you know, it's not cash in the bank until you literally cash in the bank. So it's going to be interesting question about it, but it's certainly I'm more likely to take pretty much as given the larger the GP, you usually got some pretty good packs of information there pretty forthcoming as well or check it, but you know, much more inclined to kind of trust that then I manage I haven't ever heard before that companies I haven't heard before I'd be definitely asking for a lot more financials on the underlying working out what's going on here reference checking heavily the same way it's similar process to being an LP in a fund, no, I'm I've discovered this fund day differences I haven't got a blind pool I've got a pool but actually I mean one of the things that's challenging as well actually and it and does affect the cost of capital is if I'm getting you know looking at LP steak in a fund that I don't know very well how much access to information am I actually going to get on that you might get. You might get quarterly reports capital account statements you might get some board packs for a couple of companies but really pretty limited in some regards and they have to make a judgment call as to whether you proceed or not and on the venture side you know a lot of venture funds themselves do not have the financials of the underlying companies because they haven't been on the board for 10 years and very tightly held information it's really very very difficult and so it's a bit like being an investigative journalist sometimes working out what's really going on in some of this stuff but there's a line beyond which it becomes impossible to lend and you know Matt tell me if you your take is different I know we see a lot of these secondary offerings my take is there's probably the biggest gap in venture and real estate and that we look at you know private equity private credit is probably a smaller gap there I don't know if Alex or Matt you guys agree with that statement across classes when you say yeah or the gap between nav and you know true market clearing price that I think real estate probably driven by high leverage on the portfolio where you know if the price goes down 20% that can wipe out half your equity you know versus a lever class you know maybe typical discount trading prices discount to nav for secondary funds yeah I think Alex laid out some of the things really well in the difference between Evergreen and drawdown like a lot of the stuff that we're looking at when we're doing underwriting that applies a lot to drawdown but that we use to apply to Evergreen is the difference between their holding values and their ultimate realizations right and so the best GPs as Alex mentioned those they typically end up realizing their companies on the whole on average for significantly higher valuations than they hold which is counter intuitive to what we were looting at before and what common nomenclature sort of things of like this nav is just made up and they're just cherry picking data and the best GPs that's actually the absolute opposite right they're trying to set expectations and then significantly beat them where I have found that the valuations become the hardest to pin down is that venture right where it's like okay well this is a 2000 and you know this is a 2022 valuation but the you know the discount rate is drastically changed the terminal value is drastically changed and like these companies prospects like could be 180 degrees from what they were a couple years ago real estate where depending on the GP a lot of GPs hold their real estate at cost unless they're in an evergreen vehicle they hold it at cost through realization and so it's just a completely different ball game and like how to actually value that becomes a very different question and then what we've seen this year in private credit is really interesting in what we were talking about before and what Alex was mentioning in terms of how different GPs are marking assets because when you are holding credit and it's in a club deal and you know Apollo KKR and Blue Owl etc are all holding it they have different views on what their historical recovery rate is how distressed the asset is when something shifts to pick should you then be marking it down because again you're holding credit right so like even if the equity value or the LTV has gone up you can still view it as oh I'm still going to get a hundred percent recovery like why would I mark this down below par some lenders are way more conservative and they're like oh it moved to pick I'm marking it down to 95 cents even though I'm pretty sure I'm going to get a hundred and others are like well why would I do that and that's we've seen a ton of that in the last six months or so so yeah I mean I do think to your initial question that private equity tends to be a little bit more straightforward maybe because there's more oftentimes just one source of authority right control by out there's one evaluator right so whereas these club deals and stuff is it gets a little nutty yeah I think echo of that well we really appreciate you have taken the time to share all this insight with us Alex for anybody who's listening here who wants to get in touch with you or more information whether that's as a potential borrower may they're interested in from the investment side just want to connect what's the best way to follow along what you're doing or get in touch I think it look no dem.com is our website we've got an insights page there with a lot of information that if you're just curious about how it all works some information then there's a live situation you'd like to discuss options is always worth reaching out through the website and the team will pick it up and we try to be as quickly as quick as possible and straightforward and we understand this is the first time people are often using a facility like this so we're well versed with it but no thanks Tat and Matt for having me as well. Thank you. It was fun. If you enjoyed today's podcast and want to continue the conversation that's exactly why we started long angle long angle is a vetted free community of over 7500 successful entrepreneurs executives and investors for navigating the challenges and opportunities of wealth together click the link in the show notes to apply we'd love to have you.