32,000 Companies, 1,500 Exits: Why Direct Secondaries Became Private Equity's Liquidity Fix - David Wachter - CEO at W Capital Partners

Secondaries become private equity's answer to an exit drought

Private equity owns far more companies than it can exit. Holdings grew from 7,000 to 32,000 while exits stayed near 1,500 a year, and cash returns to LPs have fallen to 7% to 14%, so investors now wait about a decade to get paid. Direct secondaries, where a buyer takes a stake in a private company or an existing fund position, have moved from a distress signal to a standard liquidity tool. W Capital has spent two decades building the franchise that sells it, and now sits inside BNP Paribas.

Takeaways

• Exits stalled while portfolio companies multiplied. Private equity backed companies grew from 7,000 twenty years ago to 32,000, while exits have held near 1,500 a year. With assets at $5tn, firms must generate returns without selling businesses or taking them public.
• Cash returns to LPs have halved. Yield on NAV ran about 20% cash on cash before 2021 and has fallen to 7% to 14% including principal. It now takes roughly ten years to get money back, which makes the squeeze structural.
• Secondaries are a solution, not distress. GPs, LPs and specialist buyers now treat the secondary market as a tool embedded in the capital markets. Wachter says the shift came almost overnight in 2014 to 2016, when buyout firms realised they could recapitalise companies and keep growing them.
• Direct secondaries beat continuation funds. Continuation funds, which appeared five to seven years ago, carry conflicts of interest. Direct secondaries give a GP partial liquidity and more DPI, illustrated by selling a quarter of a tripled Apple position to rebalance and realise a gain.
• Scale became mandatory in direct secondaries. Starting about five years ago the largest private equity firms adopted direct secondaries, so the ability to write big cheques became critical for specialists. Wachter says there is now more access to capital privately than publicly, even for buyout assets.
• Distributions must fund the next cycle. Wachter says the feedstock for the next generation of private equity investment has to be distributions, and IPOs will not fix that. Interim liquidity is critical to the market's growth.

How W Capital built its platform

1. Wachter studied engineering and wanted to go into tech, then spent fifteen years in investment banking at Lehman Brothers and Jefferies, where he ran tech banking.
2. He founded W Capital after the internet and telecom bubbles burst, financed deal by deal by Goldman Sachs, buying portfolios from companies such as Intel and American Express.
3. Early positions included OpenTable, Pandora and RiskMetrics. The firm stayed independent for twenty years, writing large cheques largely through co-investment.