168. PE Secondaries 201 feat. Evercore’s Justin Resnick

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We should know, after decades working in teaching at the world's most prestigious investment banks, private equity firms, and hedge funds, we are the Wall Street skinny. Two lifelong best friends here to explain everything about how the world of finance works, and make it feel like a gossip session with your besties. We break down deals, talk about the news in the markets, and bring on experts that we can ask all the dumb questions of so you can go to starter in real life. Hi, friends. Welcome back to the Wall Street skinny. I'm Jen. Hi, Christian. And this is our long-awaited reunion after a few days. Just gave birth. And it is not back. We're not-- like, you never left it, so you're not back. But we haven't been able to connect. And it's been so good seeing your face. How are you feeling? You too. Doing well. We had a baby boy. He's two weeks old today. You obviously, we talk all the time, but you're also international right now. So I'm like, we haven't even gotten really to catch up on the phone. And so I was actually so excited to even do this just to see your lovely face. I miss you. But yeah, no, it's good. I mean, this is the thing with life as a newborn. I was joking when I initially had him. I was like, what's worse, pulling back-to-back all nighters as an investment banker or having a newborn? I think newborn is the takes the cake. So anyone who's doing tons of work all night, whatever, it's preparing you to have a little baby. So congratulations. So if you're doing work that you're doing, you have this wonderful little human out of it. There's somebody's beggars who'll work on a deal with the problem. That's true. It's like, you're the one who's the one who's the most organized. And then you're the one who's wonderful and perfect. Yeah. But I'm excited to release this episode. This was something we recorded before I had the baby, before you left. And so anyway, I will let you tell our people who are here for understanding PE Secondary as you don't want to hear about. And like, random life with the newborn, what we're going to be getting into today. So we're bringing back Justin Resnick, who is an MD at Evercore, working in the private equity secondaries group. And we had done a 101-level episode on Secondaries. Gosh, last year, which, by the way, huge shout out was an introduction made by one of our Instagram followers. You and I-- well, you may have. I had never even heard of PE Secondaries. So one of our asked me anything. Someone kept me like, what are you going to talk about Secondaries? Second-- and by the way, I was like, OK, not to sound dumb, but I have no idea what a PE Secondary was. And this person was so wonderful and actually introduced us to his former mentor at this man, Justin Resnick. So if you haven't listened to it yet, please listen to our private equity Secondaries 101 episode. This is a follow-on episode to that where we go into much greater detail and discuss how the market has been evolving. And we'll explain again what private equity Secondaries are. But in the environment where so much is changing, right, we've talked about this, how back in January, this was supposed to be the year with all the IPOs and all the M&A activity and all these big exits and all these new investment opportunities. And it's been a year unsaid of massive volatility and uncertainty. And private equity Secondaries are a tool that are being used more now by investors than ever before. It is a massively growing and rapidly transforming market where investors ranging from GPs to LPs, so general partners to limited partners, are using this technology in lieu of the very traditional buy-a-thing and then sell it and move on to the next. So there's so much to discuss in this range of things that we call Secondaries. One other thing to add is I think the other kind of impetus was sort of the threat with the tax consequences from the big, beautiful bill in terms of what was going to ultimately hit in Dalman's foundations from a tax perspective. I think initially the Trump administration was talking about a 22% tax on endowments and again foundations who are the LPs who are investing in these private equity firms. I think we're ultimately shook out. Like there's no tax on foundations. We need to double check all this, but I believe it was like no tax on foundations. And then the actual. I actually never got to read about in the big beautiful bill. Like I've been, well, none of that is that everything else. I totally felt like one thing we talked about. Lastly, in the beginning of the year, when it ultimately got revised, it wasn't a 22% tax. I think it was like 8% and 4% because it depends on what is the endowment per student. So you have your Princeton's and nails and, you know, Harvard's who have much higher endowment money per student. So I think like worst case scenario was about 8% 4% was sort of so anyway. So like the actual numbers were not as bad. But again, the first second quarter of this year, you had all these people who were like trying to figure out shit for how these massive tax consequences are going to deal with it, trying to exit some of their investments. But it's to your point, the volatility's been insane because the market had a huge drawdown in April. It's basically back to peak. I mean, the M&A and IPO markets are starting back up again. There's tons of activity. The volatility has been wild. But, you know, if you are an endowment and you're trying to be conservative and be like what matter, these tax accounts consequences like markets going crazy, you're trying to figure out if I need to liquidate some of my liquid investments, how am I going to do that? What are your secondaries? Especially in the world where the denominator effect has truly taken hold. It's one thing to have your public equity portfolio be in an all time high. That's fine. You can trade in and out of that thing. But what you can't trade in and out of in such a liquid fashion without the use of this technology is your private capital investments. And so that's why this exists. And so if LPs are finding themselves overallocated to private capital funds in terms of their overall allocation, there's really nothing they can do except sit around and wait for these exits unless they utilize some of this technology. So, Justin is absolutely phenomenal. It's also one of these career paths that like if you know you know, it's becoming one of the hottest desks to sit on within these firms. And so from a recruiting standpoint, I think it's really interesting that in our generation, this certainly wasn't something that we were talking about. It wasn't like, ooh, I'm on the secondaries, doesn't it? It was new. What the heck is that, right? Yeah. And so, there's a lot more competition and more people clamoring for entry into this type of role because it lends itself so well. You learn the same skill set that you're going to be learning if you want to definitely work at a private equity firm. And by the way, those are your clients. So, it's like all the perks of working in the financial sponsors group, if you will, at an investment bank. But also, like you're really in that deal flow and you're really in that valuation skill set. So, it's just, it's incredibly valuable. And speaking of potentially exiting private equity firms, there was a huge headline that broke yesterday that Goldman Sachs is going to require quarterly loyalty oaths from their employees saying that they haven't accepted a future role elsewhere. And this is kind of the latest round of the Wall Street talent wars. We initially saw Jamie Diamond with this leaked internal memo saying that if you were to accept a job within first 18 months of your career, JP Morgan, you might find yourself without a job. And in response, Apollo, TPG and General Atlantic have now said that they are effectively putting on cycle, recruiting on hold for the incoming class of new hires for their firms for the year 2027. I said I'd put that on hold until 2026. And for those of you who are new to this kind of news, you're like, what do you mean? Why would you be hiring for 2027 jobs in 2025? Believe you me, that's how the rest of the world feels. But this had become the on cycle recruiting calendar, day, regard. And no, not only are the banks cracking down on the ability of young talent to take these jobs, but the private equity firms are saying, that's okay. You guys don't have to rush to do this. I think what's getting lost is the new ones in this conversation of, hey, what about everybody else? What about all the other firms that haven't announced this delay? Like what are they doing? And B, if you are a young person who is either a summer intern or has accepted a full-time analyst role, what's actually going on, right? Are quiet conversations happening and it's just happening more discreetly and it's a wink wink nod nod. You have an offer, but I won't put anything on paper. It's very hard to know how to navigate this. And we rolled out a little bit of a roadmap in this week's newsletter that I think is worth reading that's going to come out. It will have come out actually by the time this episode airs. Yeah. I think the private equity firms, to be honest, are probably a little bit relieved because we've talked about this before. Like you're not getting the best talent if you're trying to recruit purely based on a pedigree because there's a lot of things you just don't know about someone's work ethic. They could be amazing on paper, an absolute just crap when it comes to their actual job. So I think that's number one. But you know, I think all these. spoke to AJ, this was way, way back in our "Private Equity 101" episode, where it was like a lot of these firms, they don't necessarily want to recruit that early, but it's like, you can't not, because it's the prisoner's dilemma. The quote-unquote "good talent" or "who seems the best" is going to be snatched up. So if everyone basically says, "Hey, we're not going to recruit early," then it makes it so that you don't feel like you're. And by the way, actually, the fact that you have a Apollo and TPG, which are sort of crown jewels, I mean, "Private Equity Megafunds" that people are aspiring to work at, because they're not recruiting early. It doesn't incentivize people who may be are interested in PE and want that quote-unquote prize. They're not going to want to start recruiting and accepting offers, because they're potentially going to want to hold out for some of these. These "Private Equity Megafunds." So the "Private Equity" firms, I think that they actually do see the benefit of waiting until people have had some experience on the desk and actually getting almost like a performance review, being able to talk to the managers and all that. You know, it's funny because back when I was recruiting, the "Private Equity" firms literally would talk to the MDs who were. I was an infinite sponsor, so they were infinite sponsors. They would ask about how people were performing. So it was one of these. They could get some references. Which you do using normal things in course of business rather than this live-in-night, "Hey, this person who you've never met, like, I'm going to have to be working for you in two years." Because I think that there is a very different thing between hiring someone, not only because of the issue of not having their performance, but also like the senior-rightist problem of someone who's joining your team in a bank and they already have a "Private Equity" offer, they don't have the incentive to work their ass off the way that somebody who needs to get the glowing review is going to. It aligns, I think, incentives on all sides for people to stop trying to jump the gun. So. Yeah, I think one other thing that's kind of lost in this conversation that we're having, but that I saw so much in our DMs, was the nerve of these banks, but by the way, don't have enough positions for everyone who is an analyst to become an associate within the investment banking division. Yeah. Right. That's not how the program was historically designed. And they will not hesitate in a downturn or in an off cycle in the market. Because they are notorious for overhiring and overfiring. So it's like going on a date with someone and they're saying, "Hey, listen. You know, we probably won't get married, but don't you dare go out and meet anyone, lock yourself up in your room and just date me, but just know that there's a 90% of us we're not going to get married." Like, "Right." What? You know, you can't force loyalty is the bottom line. And I don't think that demanding these loyalty oaths is the way to get people to feel motivated to want to stay and work for you. I think there's a totally different way to engender loyalty. And this is something we asked Justin about. And I love his answer about kind of the give and take of the mentorship and the teaching that happens within these firms. And I think it needs to be much more of that give and take attitude rather than like, you should be so lucky to work here. And by the way, don't even think about using this program as the de facto talent farm that it has been for the last 30 years, that has everyone's consent, that no one was complaining about. And now all of a sudden we're pushing back. And we're going to offer you the candidate. All you care about is making sure you have the best future career. If the best future career is here at your investment bank, I will pursue that. But in the economics and the potential job opportunities are limited for me here. You can't just say, but you have to be loyal. Right. So I think it should be affected through better mentorship, better training, better long term job opportunities within the firm, and better perks for retention rather than punishments for disloyalty. Yeah. I feel like it's funny. It almost does feel a little bit like a trading game. You know, it's definitely I agree not fair to the candidates who are, by the way, going to be some of the best in the brightest that they're getting jobs at JP Morgan and. And just client. Well, that too. But again, it's like the quote unquote some of the best of the best are the ones who are going to work for JP Morgan and Goldman Sachs. And so they're getting like this amazing prestigious job. And then being told, if you even dare to try to get this job in private equity, you're out. And so then it sort of is fostering sneakiness and like, these candidates don't know what to do. So actually, we should try to see if we can get a headhunter on and talk to them about like what's actually going on behind the scenes. What are the conversations happening? What are they saying to these candidates who are like, I really want a job in private equity, but what do I do now? So my hope is that the end result is that nobody's going to have to be punished. And it's just going to result in private equity firms doing the right thing and holding off a little bit and recruiting a little bit later. And banks saying, hey, like, by the way, it's not illegal to network and so. Yeah, yeah, yeah, yeah. I mean, God love you. If like, this is the opportunity for everyone to say, let's pump the brakes on this insane process. And you spend your first, whatever it is, 18 months on the job, building relationships, getting deals under your belt, navigating all of Wall Street and building your network organically and building those actual relationships to then be like, hey, instead of going through this insane midnight phone call exploding offer to sell test blah, blah, blah. Let's just be like, we know this person. We love them. They're super successful in their role. Their manager says glowing things. They should be working with us. We're all friends. Well, or they can do that and they can do that 18 months into the job. And if everybody just sort of agrees that that's how it's going to be, it's like a normal, it's like a normal, freaking hiring process. That's how most job offers work. Like you're not getting a job a year in advance, unless, you know, again, you are like the superstar trader and you have a three year non-compete. You have to go, you know, what's it? Not sit on the beach. You're on guard and leave on guard and leave. But yeah, unless like you have some sort of non-compete, you have to sit out. That's not how recruiting works. And like, it should just go back to like normal, freaking hiring. So that's my, that's my hope. Well with that, let's get into our subject matter of the day. Private equity secondaries. This is our 201 or 102 or whatever one to call it. I'm so excited to have Justin back on. He's absolutely phenomenal. You guys are going to love this. Awesome. All right, so we are so excited to have Justin Resnick, who was an MD at Evercore back on the podcast to talk about secondaries. So he is a repeat guest. We had him back on. I think it was almost a year ago to go through secondaries 101, go through the basics. What are they? How did they work? And because secondaries have become just, I feel like massively popular in terms of investing and kind of what's going on in the market. We wanted to have Justin back on. We've got a ton of requests from people asking for almost like a secondaries 102. But amid the backdrop of the administration, putting pressure on endowments, who are obviously huge investors in private equity, as well as just a push to more retail and a whole bunch of different things. Secondaries are a huge topic. Maybe we should start by just quickly defining secondaries. Everybody you need to go listen to the first episode. But if you're in a time crunch, can you quickly define for us what exactly secondaries are why they're used? And you know, when you talk about LP versus GP lead transactions, what exactly that means? Sure. So just the clip of those version right is private equity is an illiquid asset class. You're generally investing in a fund that in private equity is usually a 10 year fund. And so your money is locked up for that amount of time. And so there's not necessarily liquidity coming out of the portfolio. You are trusting that GP, that manager, to invest those dollars, hopefully grow those dollars and eventually give them back to you. So the secondary market is providing liquidity to an otherwise illiquid asset class. And so on the LP side of the market, the endowments, the pension funds, the family offices, all those large institutional investors can seek liquidity for those illiquid positions by selling their interest, their LP limited partnership interest in those funds. And so our team at Evercore is market leading platform. We will run an auction process to sell that interest or interest. Many times it's a hundred million. It's a billion dollar portfolio. It could be a million dollar portfolio and it could be significantly larger than that. And we'll run an auction process to maximize the price. And a lot of those pricing dynamics is what driving the volume that we're seeing today. That's the LP side of the market. From a volume perspective, I think we fully expect to have a record year for our market. Last year was about 160 billion dollars in total secondary volume. That's both on the LP side of the market. And all the LP's selling private equity exposure, alternatives exposure more generally. And the GP side of the market, which is where I spend my time, which is mostly continuation funds, but other liquidity transactions as well. Both sides of the market are incredibly active. I would be surprised if we don't do 200 billion of volume this year. The GP side is saying the same investors that have lined up capital to buy those interests on the secondary market in these funds can also provide unique solutions to LPs through a GP-led transaction. So instead of the LP, the limited partner seeking liquidity, the GP is going to lead a transaction to provide a liquidity option to their underlying LPs in the fund. And so in many cases, especially in the past five plus years, that has taken the form of a continuation fund. A GP will look to provide a liquidity solution for one or more assets that they want to continue to own for longer assets that they see as having continued upside. Maybe they want to invest additional dollars that don't exist in their existing funds structure. And so we will run a similar process that targets a similar investor universe to bring [BLANK_AUDIO] investors to provide that liquidity option, provide a price for the underlying investors in those funds to take liquidity and crystallize some level of return, or they have the option to stay in the deal in this new structure. So it's sort of this win, win, win, where the LP has a liquidity option, the GP can continue to manage the assets with access to more duration and capital. And the new investors have access to an asset that they've been able to underwrite and provide a price on and hopefully ride the upside from here. - And just to really hammer home this idea of the LP side and then the GP side, there was rumors that Yale, which is one of the largest endowments in the US, they were per this article looking to sell out of like 100% of their private equity position, meaning they were looking to potentially tap the secondary market, talking about just the fact that there was gonna be this lack of exits in terms of private equity, not being able to sort of tap the IPO market or tap the M&A market. And then yesterday, I saw an article saying that over half of LPs are seeking to buy and sell out of these LP-led positions on the secondary market, is that actually the case that you have these endowments that are seeking to sell out of these massive positions. And if so, is it being done almost in like a fire sale aspect, is it more strategic? Like what exactly is going on there? - Yeah, so I think you have a couple of trends going on there. First of all, the LPs side of the market is incredibly active right now, both because of the capital formation side, the secondary investors out there are better capitalized than ever. And so they're chasing these deals, chasing these opportunities to try to acquire this exposure and deploy their funds in an attractive risk-adjusted return type of way. But you also have a lot of the M&A being down and new fundraising. If you're an LP, you want to invest in that GP, if it's a core GP, you want to invest in their next fund. You don't want to miss a vintage of their fund cycle. - Do you want to get into Blackstone or like KKR or like these? - Right, so you're getting to all the GPs that you continue support that have generated returns for you. And so if there's no liquidity coming out of private equity because the M&A market is slow, the IPR market is basically shut down, right? Then how are you going to do that? And so I think what you've seen is LPs get more and more sophisticated around how to actively manage their portfolios. And the secondary market is the place to do that. And so without commenting on specific transactions, right, I think the trend of LPs being more sophisticated, being able to tap into this liquidity market will continue. And what you're seeing in the past probably at least six months and probably closer to 12 months is really strong pricing in the secondary market for high quality GPs, right? Brand name, private equity funds and managers with continued upside from here, more recent vintage funds. Pricing is very close to parts. It's certainly in the 90s and probably mid to high 90s and if not par in certain situations. And so you have LPs that are opportunistically looking to say, well, I can sell out of these old funds and recycle that capital into some new funds. That's an attractive option, especially when pricing is so strong. And so I think it's kind of a little bit of a lesson if you can't always believe what you read in the news. And a little bit more of LPs being more sophisticated, opportunistically accessing this market. Let's say I can't always believe what you read in the news. I've seen a lot of headlines over the last call it four weeks about a potential bad vintage crisis for private equity firms. And you talked about great opportunities to invest. What about the flip side of that argument that there may be this bad vintage crisis of funds from call it 2018 to 2022, where everything was at a fever pitch, rates were close to zero. And now dynamics have certainly changed. Does that rumor have any teeth? - Yeah, I think the beauty of the secondary market is that the capital is incredibly flexible. And so that dynamic may exist in certain funds and certain GPs, but those are the assets that are probably primed for continuation funds. These are assets that maybe need a little bit more time to develop that have done well or chugging along. Maybe took a little bit longer to grow into their entry valuation multiple. Maybe it was kind of had a very strong appeal. - Took longer to grow into their entry valuation in multiple. That is the most adept word salad I've ever heard in the best way possible. - Oh no, it makes my congrats to you on being able to put that together 'cause it makes you sound like it's so, yeah, totally makes sense. So I think everything was overheated at the time. - Everything was overheated, right? But you had fundamentally really strong businesses growing at a really attractive rates in attractive markets. Right? And so yeah, if you bought in at some high multiple and you were to keep the enterprise value for that asset relatively stable on your marks and your quarterly marks, and your implied EBITDA or AR, whatever your valuation multiple, metric is, then yeah, you're looking to eventually manage that to something that looks more closely to where the comps are now trading. Right? As you guys, I'm sure, have spoken about with your viewership, how assets value and sometimes there's public comps and sometimes there's transaction comps and sometimes there's kind of fundamental analysis and all of those things go into how GPs think about valuation. - Yeah. - But I think again, fundamentally, these businesses are strong businesses that require maybe a little bit more time and require maybe a little bit of a bounce back in the M&A market to exit in a market that will optimize value for the underlying investors. And sometimes depending on the fund structure, depending on the capital availability in that fund, you may want more time. You may want to provide a liquidity option that is a little bit earlier as opposed to making LPs wait another three, four, five years. And so therein lies kind of the balance of fund management and the options that now exist in today's market. I'm curious, there is this huge push for a lot of these LPs to strategically, I don't want to say cash out, but monetize, liquidate, whatever, like essentially take money off the table via the secondary market. What is the actual mix of LP versus GP lead transaction these days? Is it much more skewed toward the LPs side or is it actually still pretty even like are a lot of these private equity firms saying, hey, again, we have these like great assets. And by the way, these, you know, M&A market, I have you a market, we can't get out. So let's put it into a continuation fund and kind of go that route. What is the breakdown? I'm curious. Yeah. So in any given year, and this has been relatively consistent for at least the past handful of years, it's in the ballpark of 50/50 from a volume perspective. So last year, I think it was closer to kind of 90 billion on the LPs side, 70 billion on the GP lead side. But, you know, whether it's 50/50, 60/40, 55/45, it's usually somewhere in that range. Yeah. And part of that is driven by just the opportunity set, the other part of it is driven by how the secondary investors out there are looking to deploy their funds. It's a matching of supply and demand. And so I think we would expect that to continue somewhere in the 50/50 range. And you also said that a lot of these secondary funds are very well capitalized. Is that kind of a function of having fund raised over the last few years? Are they still doing well fund raising today? I'm kind of curious just what that market looks like because fund raising for private equity, my understanding is that's down. And I know it's a tough market for hedge funds. It's just a tough market to be raising money in general. So was a lot of this from past years, or is this their having a great time fundraising even now? Yeah. It's a little bit of both. I think the fundraising cycle in secondary tends to be quite quick because the deployment opportunity is pretty significant. And so you'll see these groups that are raising 10, 15, 20, I mean, already just raised a $30 billion fund. So some of the largest private equity funds in the world, putting aside strategy are secondary funds. That's wild. I think we expect that to continue the allocations from these institutional investors are increasing towards secondary pockets of capital, notwithstanding the fact that the overall fundraising market is challenged. And so I think that is driven by fundamentally just returns, risk-adjusted returns. You have, instead of blind pool capital, you have generally speaking funds that are buying into seasoned assets in some form or fashion, many times are buying into a discount. And so if you think that there's some level of discount on the buy and GPs generally hold things on their books on a relatively conservative basis, and there might be some pop at exit as well, then you put all those things together, and that's a pretty interesting strategy. And you're seeing that play out in returns. So secondary fund returns, we actually, we do a semi-annual study on the GP-led side of continuation fund returns. These continuation funds are really the market only exploded five, six years ago. And so you're just starting to see the realized track record of these continuation funds of the GP-led side of the market. What you're starting to see mostly on unrealized basis today because a lot of the exits haven't happened, but even in the realized exits, is that the secondary returns are in line with private equity with a narrower fan of outcomes. So you don't have as much risk because it kind of makes sense. You're buying into an asset this GP is known and listed with for at least two years and many times four or five, six years. So should you have your zeros, right? Probably not. >> Unlike. >> Yeah. >> Are you going to have your 10x returns? Maybe not. Maybe those are fewer and farther between. But do you feel really good about another two or three times return from here? Yeah, you probably feel really good about that. We're starting to see that come out in the numbers. I think as that continues to happen in terms of unrealized track record transitioning to realized exits, that's just going to be another step function change in the secondary funds ability to fundraise. >> Can we talk a little bit about innovation in this space? >> We were learning very much at the 101 level in our first recording together, and the concept of a continuation fund was certainly new to me at the time. I don't know if it was new to Kristen. >> Yes. >> What other technologies are evolving in the space as it becomes more mature? >> Yeah, I think first and foremost, you're seeing an expansion outside of just typical buyout private equity. That's still probably 80 plus percent of the market today. But what you are seeing is new pools of capital that are being raised to target different parts of the market. Whether that's infrastructure, credit is getting huge, especially this year. >> Yeah. >> Fenture, all of these subsectors, these asset classes of the broader alternatives market, are similarly locked up in closed-end funds for the most part. This liquidity technology can apply. We're seeing huge interests both on the supply side and the demand side. A lot of it is education on the supply side. If a credit fund has never done a continuation fund, then it's on us and the buy side to go out there and educate the market. When would a credit continuation fund make sense? >> Yeah, that's my question. Hang on a second. Are we talking about more direct lending-based strategies? Are we talking about more complex, maybe asset-based lending strategies, and just going through the two categories we've covered on this podcast, rather than introducing others? What are you seeing in one of the mechanics of that as a vanilla bond gal? All right, under what circumstances do you have a continuation of alone with someone? Typically not good ones. So I'm curious what those continuation funds look like. >> Yeah, to your point, credit. And most of this is senior direct lending, unitronge type exposure. That's most of the market, although even that is changing, as capital continues to get raised. But your point is basically you have a finite life asset in a bond that has a maturity, and you have a finite life fund. And so shouldn't that all just kind of work itself out? Why do you need more time versus equity? And it's a fair point. >> Why do you need more time if things are going well? I guess it's my point. >> That all fair except if you kind of go back to the conversation that we had around M&A, right, many times in a credit, you're depending on the sponsor selling that asset in three to five years. And it could be a performing asset that's growing quite well. But maybe the M&A market is slow and maybe that GP wants a little bit more time. And it's just taking a little bit longer. >> Yeah. >> And you combine that with the fundraising pressures of maybe a new fund, a new flagship fund being raised for that GP. Well, providing a liquidity option to your existing investors to get them to come into your next fund tends to be an interesting alternative, right? And so that is one example of a motivation that could make sense. And again, pricing on the credit side of the market has been quite strong, given the supply demand dynamics. And so if you can offer an attractive liquidity option at an attractive price and allow those LPs to effectively recycle that capital into your next fund, that goes back to that win-win-win. >> And really dumb question going back to part of our earlier conversation. When you say pricing being quite strong, I just want to make sure I understand. When you say pricing is quite strong, from whose perspective, from the new investors coming in or from the people looking for exit? >> Generally speaking, the secondary market prices off of a reference date, NAV. So what does that mean? Right? If you're an investor in one of these funds, you get a quarterly report from this fund manager that says, based on all these different valuation methodologies on a bottom-up basis asset by asset, this is where we think these assets are valued. If we could sell them today, right? And these are illiquid assets. And so maybe there's some type of illiquidity discount, but depending on how the GP does their valuation. But relative to that mark, that's how the secondary market prices these deals. And so when I say attractive pricing, it is in and around that valuation as of a reference date, a quarterly valuation mark. >> So we actually had also a number of audience questions that are very advanced. And I figured I would ask because there were a number of people who were like, this information is nowhere. So who better to ask than obviously you? So someone was asking about something called a collateralized fund obligation. What the heck is that? I started my career in CDOs, collateralized debt obligations. What the heck is a collateralized fund obligation? >> Yeah, so and I'll keep it relatively high level. But it's very similar technology, right? It's effectively securitizing private equity. You can do that on either the LP side or the GP side. And so on the LP side, if you have a portfolio of alternatives exposure, and many times it's credit, but it can be a mix, you can instead of selling that portfolio at some discount potentially, you can tranche out the cash flows coming off that portfolio. And effectively securitize that book, you generally retain some portion of the equity. And you can attract lower cost to capital investors like insurance capital, because you've rated, you have basically rated that. >> Got it rated. >> On the senior tranches of this pool of assets. On the flip side from a GP perspective, you can take a similar pool of assets and use this as a fundraising tool and bring in additional capital to a flagship fund by using the same kind of securitization technologies. We have a structured capital solutions team that is doing incredibly well, growing incredibly quickly, doing this on both sides of the market, GP and LP. But yeah, I think it's just a further expansion of these liquidity alternatives for both LPs and GPs alike. >> And you said it's more common to see this in credit funds, which kind of makes sense given that it's like, collateralized at obligations. You basically buy a bunch of different, and usually they were loans made to companies that were being taken private via a leverage bio. You would buy all these loans, put it in a little package, water out the cash flows. This cash will go first, you're going to get the least amount. You get everything rated, you sell off the pieces. A lot of times the KKRs, they would actually retain the equity in these CLOs, like they would be the ones who were managing these assets. And so on the debt side, that makes sense. But you're saying you can actually even do it for the equity as well. It becomes like a cash flow question, right? You have interest on the debt, on this CFO. And so that's why credit I think is generally a good solution, because there's just a cash yield component. But I think if you have a diverse amount of enough portfolio of private equity that is seasoned enough, then you should be able to, on a probability, adjust to basically model out what you think that cash flow profile is going to be as well. So I think you see a mix. >> That is so interesting. >> I know we have another question here about more structures you've seen, but I have the memory of a goldfish. I've got this written down, but the chances I forget it are quite high. One of the major themes that we are constantly talking about, it seems to be the biggest theme for every conference out there, is greater access for wealth and for retail to private capital. What are you seeing with respect to the secondary markets and how that is playing out? What's the relationship there? Are things like these CFOs being used to create more palatable retail access? Or is there other technology? Where were the secondaries really fit in with this new mass source of potential incoming investors? >> Yeah, so I think today the more structured CFO side is probably a little bit too structured and complex for that world. But I think on the pure played secondary side, it's a huge tailwind in our market. It's been a huge source of capital for the secondary funds, many of which, most of which, have set up some type of 40-act fund retail product. And they're raising- >> Oh God, we are not all right here. Like, 40-act fund. I'm having flashbacks to the Series 63 or something. Could you explain with that as far as listeners? >> Yeah, to your point, right? It's a fund structure in which basically financial advisors out there can sell this product to their individual high net worth type investors. And through that network, whether it's banks or RAs, etc., you're seeing secondary funds get on these platforms and raise hundreds of millions, if not billions of dollars, through this kind of newfound pocket of capital that is not a institutional appeal. It's not a 6, 9, 12, 18 month fund raising cycle. These are monthly inflows that are coming in. The interesting dynamic is that that capital tends to want to get put to work quite quickly. Right? But this is the second that hits the platform. The IRR starts ticking, right? The dollar is at the- >> Right, right, right. You could be in your fidelity fund, earning 5% risk for you. And now it's- But question, back to your earlier point about kind of blind pools of capital versus knowing what you're investing into. What transparency is there for the retail or the wealth investor investing into a secondary spine. The Kristen told me some statistic of the average retail and value of the spend six minutes researching a company before they decide to invest in a single name stock. The wheels are now spinning in my head trying to put myself in the shoes of the high net worth individual who's like, "I want access to private capital markets." Put me in this secondary fund, put me in the one with these companies like you know, like I you know, I'm just how does that all translate? What does mechanics? Yeah, I mean I think the same kind of risks exist for sure, but I think the theme of investing in a season portfolio versus investing in something that may take five years to even deploy. I think that is a pretty attractive piece of the portfolio. I don't know that anyone is saying the only thing you should ever invest in in your in your PA is secondaries, but I think as a piece of the pie, right, it's a pretty interesting way to deploy capital and to have it be put to work very quickly. Back to what you said, Jen, I do think that there's probably the case that if you're spending six minutes deciding whether or not to like buy Apple, it's not because you're sitting there and being like, "I'm going to look at you know what the earnings expectations are and like the business model and you know blah blah blah blah." So I do think it probably makes sense for people to be like, "I've heard of Blackstone." That seems like a great fund. All these big guys, the gills and the harbors of the world are invested. I want to invest in that so I could see that, but I'm curious, is there like a lot of education that has to be done on the liquidity side because I will say at least if you're buying into Apple and you decide shit, I don't want to be in Apple anymore, you can sell out tomorrow. The thing with all of these alternative assets is the lack of liquidity, right? That's like where the secondary market got started to begin with is to give that liquidity to those institutional investors in the first place. So is there more liquidity when like you're thinking about getting access to the retail investor, like the wealth investor or is it a similar deal where it's like you buy in, you just got to be educated like, "This is the lock up, you're not getting your money back, how does that work?" The fund structures today, or it's probably somewhere in between, right? You're not buying and selling into these things every day and there's kind of windows where you can sell, but that is significantly more liquid than a private equity fund, for the 10 years, unless you hire someone like us to run a process for you. Again, the thesis is if you only have a limited amount of capital to invest in "Private equity," then why not invest in a fund that is effectively trying to build an index of private equity? Instead of saying, "I'm just going to take one fund risk with one GP and one vintage," the secondary funds are buying assets across vintages, sometimes across the large cap into the market, the middle market, the lower middle market, and so all of those things are pretty attractive in building this kind of alternatives ETF effectively. And so that I think is what is particularly interesting for the retail investor. And like you said, that immediacy and deployment, right? That's getting deployed. That's getting deployed across LP deals, across GP led deals, everything. So you're getting a highly diversified portfolio, especially as these funds get off the ground, the longer these guys are out there raising money, the more they're putting that money to work, and so the more visibility you have into the portfolio. And are our funds using that as part of their competitive edge now for primary access to deals of like, "Hey, guess what? We've got this actually really robust secondary's platform." So like, kind of, don't worry. We will always be here for you in some way, shape or form. Yeah, I think that's right. And I think the way that they're using it is it's basically another source of capital that can come in alongside their flagship fund and other co-investors and SMA type vehicles that they may have to write larger checks and deals. And so by doing that, depending on the deal size and what type of deal it is, in many instances, they'll take a larger portion of the deal, which means that if you want access to that type of exposure, you probably have to come through their fund to do it versus, if you can write half the check size and other investors have to come into that deal as well. And so now you have options, right? Should I invest in this secondary investors fund or that secondary investors fund? The larger check size you can write, the more of a differentiated product you can create for underlying investors. Yeah, that makes sense. And so back to differentiated products. I know, Kristen, you had this question from some of our people on social media. What other sources of debt are you seeing in secondaries? Are there any other unique structures that we need to know about as all this technology involves? Yeah, I think the secondary market is very creative, very flexible. Many of these firms have been doing this for 20 plus years and through the cycle. Right, if you look at just the kind of growth of the secondary market, this is a market that in on 2013, 2014 was less than $50 billion. Right, now we're going to do 200 plus. And so the way you do that is by being creative, being flexible, looking at different transaction structures and as the market continues to do that, you see things like, you know, navelants, right? You see things like the CFO product. You see things like GP financing, right? At the management company level. These are all kind of not core secondary products, but slightly, you know, just more related, almost like first cousin type products that have kind of foundations in this liquidity alternative is liquidity market. And the other question that we had, this is more generic and it's less specific to secondary is, although I assume in the secondary market, you guys use this as well. We had talked a little bit. There was a article that Matt Levine had done on a lot of the different ways that private equity firms are using leverage. And one of the things that he talked about was subscription lines. We would love if you could do a quick primer, I just put that as a subscription line. Again, I assume they're used in the second areas world as well, but also if they're not, then obviously please correct us. Yeah, I think subscription lines are effectively a subscription line, a capital call line. It's basically leverage at the fund level that generally is kind of collateralized by the unfunded commitments of the LPs. And so it is basically a way for GPs to kind of manage liquidity, right? So instead of the biocompany and they're under the gun to send out a capital call notice for their underlying investors to fund the deal, they can put a portion in or a lot or most or all of the deal on the subscription line and then figure out the capital calls later, right? Now what that also has the out of benefit of doing is for underlying investor, I've invested the dollars later. And so if you think about how IRRs are calculated, right, there is some juice there. And so there's kind of, you know, mixed receptivity from LPs and just like what is the true fundamental return of the fund versus some of the financial engineering, but it is a very, very common tool and is a relatively low cost leverage. And so it's pretty effective, right, in terms of both the fund management side and giving a little bit of a boost on the returns. But yes, it is also increasingly being applied to continuation fund technology, especially in a world where, and I think we maybe spoke about this last time a little bit, it is not uncommon for secondary transactions to have some form of a deferral. And so a deferral is basically, and I'm just giving an example, I'm willing to pay 50 cents today and 50 cents in a year. And because of that and the associated time value of money, I am willing to pay a higher obstacle headline price because I'm spacing out those cash flows. And by the way, the portfolio is a living breathing thing. I actually may get cash flows back in the interim before I've made that second payment that'll actually help fund some of the purchase price. And so in that deferral structure, if you were to, for example, add a subline, a subscription line, you can actually use that subscription line to send more capital back to LPs on day one. As opposed to the 50/50, maybe you can send 75 cents back on day one. 25 cents of that is through this leverage, through this subline. And so it's again an attractive tool, both for GPs and LPs alike. But yes, it's just another form of relatively low cost leverage. Just confirming, if you're doing this continuation fund, you have the private equity investors who were in the initial fund who are cashing out. And because of the way the deferral works, you're going to be paid that 50% initially. You still have to wait more time to get the remaining 50. But you said, because if you use a subscription line, that's why they can then do the 75. And then you don't have to wait as long to get the remaining. You miss off the wait the 12 months, but you're only waiting for 25% yes, sorry, yes, okay, okay, that makes sense. And for our listeners who may be, this may be the first time hearing about subscription lines, correct me if I'm wrong, but these kind of evolved back in the day to fill a gap of the actual mechanics of making that capital call, you know that person being like, Oh, God, I actually have to write this check. I forgot about this this five years ago that there was this time delay where in the fund might be penalized trying to actually close the deal. So banks and other lenders could step in and fill this gap. But that was to cover like a 10 day period. How long now in reality are these subscription lines actually being used because to your point, they can be used to juice up IR so much if you never call your capital, But you've started your investment, your IRs look at you. - Amazing, right? So how long are they being used now in reality? What's their term? - Yeah, I mean, in the continuation fund world, we'll see subscription lines in place for 12 to 24 months. - Yeah, wow. - Yeah. - That's amazing. - Many times, this subline is called, you use a subline, you then call capital, pay down the subline, it's just kind of like a revolver almost. - Mm-hmm. - And so it's again, just an active portfolio management and liquidity management tool. I think LPs again are increasingly sophisticated and understand the financial engineering if you kind of take advantage a little bit too much, but. - Hey, that's where like leverage bios came from. They are like, by definition, financial engineering. You take some money, you buy a company that's sort of growing at a nice steady rate, not crazy. You lever it up a ton and oh my gosh, look, their returns look great. So it actually kind of makes sense. This is just sort of taking it to the next logical place. I will say in almost like a nod to the fact that, I feel like secondaries are starting to become even more mainstream. I was sharing this before the call that there was an article yesterday about how there are scammers now who are pretending to be secondaries firms and like, I'm like, who are they targeting? Two years ago. - I don't know, I see my Boomer dad getting a tax to be like, do you wanna invest in this new one? - Blackstone? - Yeah. - Blackstone? - Yeah. - Okay, sure, here's all my money. - I guess that's how we know we've made it in the secondaries while the people are trying to be like us. It's shocking, considering it doesn't years ago. No one knew what we were doing. - Well, that's exactly what I was gonna say. I was like three to five years ago, you asked me what a secondary, and I feel like I'm relatively sophisticated in this world. I couldn't have told you what a secondary investment was and now there's like scammers who are using it to scam people. - Yeah, I mean, and then maybe on the other side of the spectrum people doing it the right way, but also entering the market in a new way, right? I'm just showing the kind of momentum behind this market. And I think it's a dynamic that we probably spoke about a little bit a year ago, but it was really early days. The trend has just continued direct private equity firms entering secondaries, right? So whether it's the Leonard Greens of the world, the Excel KKRs of the world, A&M Capital is a new entry into middle market, a pie-out shop that is building a secondary strategy. I mean, the TPG Apollo, right? The really big direct private equity sponsors that are realizing what this opportunity set is. And many of them, by the way, are exclusively focused on the single asset side of the market. That's another shift. The increase of capital in the single asset side of the market has been a huge game changer for Austin for the world's secondaries market in terms of what size deals can get done, how many deals can get done. And I think all these things are just supporting what again, should be a record year. And just to remind myself, when you say a single asset deal, is that that continuation fund where you're just putting this like prize crown jewel asset into its own little fund to kind of allow a longer life? It can be one company and it can be as many companies as you want. But the one company deal is relatively new to the market. It's probably five, six years old. And so that has seen a huge boom over the last handful of years. That is going to be supported by this new found capital effectively where that was a wildly undercapitalized part of the market. Today, by volume, if you just look at continuation funds, it's probably 50, 50 single asset multi asset. - Wow. - Multi asset deals not surprisingly, but multiple companies together can tend to be larger. But on the single asset side, from a count perspective, it's probably, I don't know, 60, 70% of deals in the continuation fund market or single asset continuation funds. - Interesting. - Last question, I know this was not on our list, but I actually do want to touch on this because given how almost like hot, I feel like the secondary market seems like it's become, I'm curious if you've seen any change in recruiting and just the competitiveness of getting, say, like a job at Evercore in a secondary type of a role. And if you have any tips or anything for any aspiring listeners going through the recruiting process, potentially like coming and talking to you. - Yeah, so I've definitely, after the first episode, had a bunch of people reach out. So I have done my best to absolutely reply to as many and all as possible, or if not get their resumes in the right hands. But yeah, our team is growing incredibly quickly. It's a relatively niche part of the market. And that's changed over time. It's becoming more mainstream, but it is still a smaller part of market. I think what's helped is things like this, right? It's just the education of the market, the press that our deals are getting, the capital commission is happening. - Yeah, we're doing our part. - But at the same time, it's also the exit opportunities. Right? - Yeah. - So whether it's a team like ours, it's growing incredibly quickly. We love to promote from within. We look to promote first from within, but we have plenty of our analysts that are going to the buy side. Whether that's the buy side for secondaries, right, secondaries investors out there. Or we have two analysts that are actually, I think they're done this week, that are going to direct private equity firms. Whether we work on the deal with that firm, and they did really well on that deal. Or just more generally, are building a skill set and a roster of transactions on their resume because of our deal activity that in a slow and aid market, right, like we're busy or never in M&A as slow. So who's resume is more attractive? You can really get in the weeds and talk to those deals. That's what those interviews are all about. Right, so you can build the technical skill set, you can talk to those deals. I think you're going to have a ton of opportunities. And that I think is also attracting top talent. - One more question as a follow up to that. Last week, we had a bunch of headlines between JP Morgan and Apollo, and then ultimately General Atlantic. Upending the entire on cycle, ultra early recruiting process that we had seen. And I feel like you're uniquely positioned to be able to talk about this as a neutral observer because you work for none of the companies mentioned in the news, but I'm just curious to get your take as someone who has risen through the ranks and is incredibly senior within an investment bank institution. Where do you see the trends? Just more broadly speaking in the industry going. Do you see investment banks looking to retain more of their internally developed talent versus the previously very much well-trotten path of two years in your own, and kind of these investment banking analyst programs? And what do you think about this changing recruiting? This is just your personal opinion, not the opinion of your bank. I'm just curious to get your take as someone. - For me, this is something that I think has been flowed for as long as I've been doing this. Right? And so it goes down to even internship recruiting. Right? I remember very clearly being on spring break going into my junior year, not knowing what I was doing that summer. I got a call and never forget. On spring break in like Cancun, right? Something like that. And I'm like, oh God, I gotta take this. It's like a two on two number from New York. Yeah. - Step aside out of whatever party I was at and very quickly like accepted my summer internship offer. - Yeah. - And now I think that's probably-- - That happens so far here for junior summer now. - Yeah, and so I think it's a similar dynamic, right? You have people that kind of, the competitive dynamics drive people to recruit earlier and earlier, trying to get the best talent. And then you kind of whips on the other direction. Like, oh, we're doing this too soon and how much experience do they really have? We really want them to learn and get their feet under them and mature and have the banking experience. And then I'll go back in the other direction. They wouldn't surprise me if in three years or so now it's back to where we were a year ago. But I do think having risen the ranks and sat in the seat and managed analysts and associates, I know how much time, at least our group, puts into teaching and educating and growing your skill set. And so to have those people three, four, five, six months into the job and maybe even before they showed up, how about a job where they showed up? - Right, it's a little bit, feels a little bit disingenuous. It's a little bit challenging and like, why would I spend all that time to teach you and educate? So I think if there's buy-in in both directions, right, I think there's a way for both sides to be successful now. At the end of the day, everyone's their own person. You ultimately have to do what's best for you and that did not last on me, right? When someone comes in and says, "Hey, we're leaving." Or I'm leaving, if they're really good, yeah, that's really disappointing. But very quickly, hey, I'm really excited for you. Let's keep in touch. It's so fun. - And you just trained up probably your client now, right? Like someone who is likely to have a long-term business relationship with you. - I think you can tell a lot about someone in terms of how they react when you have to leave a job, right? - Yeah. - I think we've all probably been on both sides of that equation. - Yeah. - But I do think, you know, it's a small world. Everyone has their own situation, family, et cetera, to think about. So if people try their hardest and put in the work for, whether it's 18 months or you can make your own determination, but for an appropriate amount of time, you put in the work and then you determine for whatever your personal reasons are that it's time to move on to something else, then I think people should be supportive of that as long as that person manages in the right way. - Well, listen, we are rounding out on our hour, Justin, here. Is there anything that we missed or didn't touch on that you think is incredibly crucial for our listeners to understand? - Yeah, I would just reiterate that it's an exciting time in the secondary market. For as long as I've been doing this, this market has been effectively up into the right and we're really just in the, I don't know, baseball analogy, it's third inning, maybe, right? And there's still so much more growth. there's still so much capital formation to have. We're seeing repeat clients, whether it's a single asset deal on a year later, you do a multi asset deal. There's so much you can do that will continue to have a ton of value and add a ton of value both through GPs and LPs alike. And so if you're you're young and you're thinking about what part of the finance world you want to get into, I really genuinely think I say this to our analysts all the time. Like if you've done secondaries for five years and you fast forward the clock five years from now, on a relative basis, you will be very experienced. Right, and especially working somewhere like Evercore in our group with the market share that we have, you're going to get so much deal experience that whether you want to stay in secondaries or not, whether you want to stay on the buy side or not, that's just a really, really strong foundation to build through yourself. And I also think that one of the other things that so continues to excite me about it is the people across our industry, I think are just different in terms of we all kind of realize this unique market opportunity that exists and how we've all grown from effectively no market to a huge market. And there's enough space for everyone, right? There's competitors on the sell side that we get along with well. There's, you know, buy side participants that we're constantly in touch with. And so I really think it is a unique dynamic that is just it's nice, right? It's exciting. So I would continue to promote it as an interesting place to start your career. And for me, you know, build a career. That's awesome. Thank you so much, Justin. You are part of the elite club of Wall Street Skinny Two-Time Podcasts. Let's make it a third soon. We're excited to reconnect hopefully later this summer and maybe get some more intel on what's happening in the industry. And as always, we really appreciate you Justin. Thank you so much. That's right. No, happy to be here. Enjoy it. We do a semi-annual survey of the markets. So we'll have some good intel coming out the latest trends in on the buy side, the latest market volume's expectations for 2025 and beyond. So it would be good to have to hit the group on that. That's come down next couple months. Awesome. Awesome. Thank you. Thank you. [Music]