The Distribution by Juniper Square
00:14:55 · David Wachter
[00:14:55] S0: Okay. So what happened is is interest rates changed. The scale of private equity GPs portfolios massively grew during the last ten years. So, I mean, in terms of order of magnitude, there were 7,000 private equity backed companies twenty years ago. Now there's 32,000. So the AUM in private equity alone has reached 5,000,000,000,000 from about 1 to 2,000,000,000,000. The number of exits per year hasn't grown at all. It's about 1,500 exits a year. And last year, it was a high of about $700,000,000,000. So you've got a $5,000,000,000,000 market with liquidity that is a fraction of the scale of the industry. Pre 2021, the yield on NAV was about 20% cash on cash year over year. So a phenomenal asset class. You build a portfolio and you're getting a 20% cash dividend off of your mature portfolio as a private equity investor. In the last four years, that's gone down to seven to 14%. And that's not yield. That is return on capital, including principal. So basically, takes you ten years to get your money back in the current environment. So the market needs more and more liquidity. So what happened is, is a a new phenomenon, a new technology called continuation funds developed about five to six, seven years ago. And what that is is allows a GP to take an asset and effectively get liquidity for their fund, but keep it in another vehicle. It has conflicts of interest, but there are market standards, and it's become extremely popular. But that alone is providing one stream of liquidity alternatives for the GP, but it's not solving the scale of the the need for liquidity in the industry today to the full extent. Because what it does do is cash out the flagship fund from its ownership in this in this asset. LPs are allowed to roll, but LPs aren't really equipped to roll. The newest technology, which is what we are focused on and a pioneer in, is what we call direct secondaries. So instead of a continuation fund, a GP can get partial liquidity. A way we think about it simply is if you own Apple stock and the stocks tripled or quadrupled, do you wanna keep all of it, or do you now have a very large position and you wanna rebalance your portfolio so you sell a quarter of it? So it creates a realized gain. It creates a win for the fund.
00:17:55 · David Wachter, Brandon Sedloff
It allows the fund to, generate more DPI, get cash back to improve that seven to 14% yield back up to 20% and better rebalance your portfolio. So effectively have more control over the duration of your winners and how you generate liquidity for your LPs. [00:18:15] S1: So in that example that you gave, just one clarification, you used Apple public company. Does the same apply to private companies as well?
00:18:21 · David Wachter
[00:18:21] S0: So that's the beauty of it. I think it's all graying today because, I mean, Anthropic and SpaceX and companies like that, there is massive amounts of capital available to them, Even traditional buyout type assets, whether it's business services or healthcare, there is probably more access and more capital available in the private markets than in the public markets. So, yes, I used Apple an example because everybody understands you can buy and sell your Apple every day. The beauty of private capital and secondaries is you can do the same thing now in the private equity markets. And selling part of your position in Apple is not a negative because you made a lot of money and you're rebalancing. My point is, is you can now apply the exact same thought process and portfolio rebalancing skills in the private markets. So take it even further. Most of the investment banks are now adding what is called a private capital markets group inside the equity capital markets divisions. So you can, as a GP with a portfolio of companies, you can add more capital after year five, six, and seven. You can reduce your exposure after year five, six, or seven. You can sell your company and keep rollover equity and then have more confidence that you can get liquid in all of that. So this aspect of more and more liquidity during a private company's journey is very real. And continuation funds and direct secondaries are two means to do that. But there's also pref equity and there's leverage... There's all kinds of tools now which can introduce more and more capital to allow GPs to get more liquidity and keep their assets longer. Because with 32,000 companies and 1,500 exits a year, everyone has to learn how to generate returns without selling their businesses or taking them public. The only solution is excitingly secondaries.
00:20:31 · Brandon Sedloff, David Wachter
[00:20:31] S1: Yeah. Sounds like you're in a you're in a great spot, but, it's taken a while. Not a while, but the industry's matured. It wasn't an overnight kind of... I won't say it wasn't an overnight success. It wasn't obvious overnight that the industry was gonna mature in this way, or maybe it was. Was it obvious to you? I shouldn't I shouldn't frame it that way. [00:20:46] S0: So for a decade, it it was not obvious that... It was more if I sell my position, am I saying that the company is a underperforming company or my firm needs capital where I'm being paid my my LPs to grow and sell businesses? So it was a different story. And then it was close to overnight in twenty fourteen, fifteen, sixteen when, the buyout industry basically said, wait, I can recap my companies and continue to grow them. And it was both supply and demand, meaning that the capital became available to do this, And it almost overnight became a sign of strength, which is great. Wait, this company has a private market value without having to lose control and sell it or to take it public. So I can keep it longer. I can grow it longer. I can reduce my position, or I can add to my position. So all of that, it's been a couple of years, but it feels like overnight. [00:21:54] S1: One thing that you said before was you you mentioned, you know, there's two technologies. Is there a technology underlying that, or is technology more of a moniker for kind of, like, the the program of direct secondaries kind of writ large? [00:22:06] S0: So the... What I was referring to is basically financial technology.
00:22:06 · David Wachter, Brandon Sedloff
[00:22:06] S0: So the... What I was referring to is basically financial technology. [00:22:11] S1: Financial [00:22:12] S0: technology. Like, the ability to structure deals and do more things and add more innovation to your private equity portfolio management. In terms of tech platforms, having done this a long time, it's really interesting because there have been a lot of tries at building technology to create more liquidity and more information around this this market. And it's hard. Why? Because the diligence required to understand how to invest and buy in this market is limited, and the ability to share information is limited. Meaning, if you attempt to put your equity on an exchange, how much information are you able to share and what reps and warranties are you able to provide? And those two things are extremely sensitive and important in the private markets, which is why it's also a fairly constrained market from a who can comfortably compete where data and relationships do matter a lot. [00:23:21] S1: Yeah. It's a common theme across the information asymmetry. There's a lot of information that still is sensitive, as you said. So I I can I can completely understand that? I think just just switching gears a little bit. So W Capital Day, you kind of told me a little bit about the journey, but what is what is W Capital as part of BNP Paribas Alt's business look like? Size, scale, focus, kinda headcount, just any of the headline stats about the organization?
00:23:45 · David Wachter
[00:23:45] S0: Sure. So I think it's important to take you back a couple of steps to where we were an independent firm for twenty years, and we, developed this direct secondary market where we're providing liquidity to buyout firms for rollover equity or midlife growth capital. But what we saw is, like I said, starting about five years ago, this massive growth and adoption of direct secondaries as a tool being used by the very largest and most influential private equity firms. So for us, the ability to write big checks and scale was critical. We did a lot of it with co investment in in those years. But relative to our industry, almost every secondary firm was tying up with a large asset manager, and we did not have a primary private equity book of business. We didn't have a credit business and we didn't have global sales and distribution. So we said, let's see if there's a type of partner that would be a great fit for us. We didn't think a primary buyout firm would be an ideal fit because we're a solution provider to the private equity GPs. So being a private equity GP, providing a solution to other firms, we think has its limitations. We thought an asset manager with a fund investment platform would be an amazing fit for us. And at the time, AXA IM was... Had put together over the past twelve months, a a team that was gelling all of their private equity businesses, a large primary fund investment business as one of the largest insurers in the world. So very experienced at deploying capital as an LP in private equity funds, doing co investments, providing debt capital to private equity firms, and even GP stakes. What they were missing and looking for was an innovative secondary strategy that goes beyond LP led and even beyond continuation funds. So when we met, the plug and play fit was extraordinary. So as a partner for us, we now offer our GPs a primary investment product. We are benefiting from all of the data that is inside of that business, and we're collaborating closely with one of the largest LP allocators in the world. BNP acquired the entirety of AXA Investment Managers about two years ago. So we were also part of that journey. So under BNP Paribas Asset Management today, it's that original private equity team, but with more resources of BNP's primary private equity business along with all the other parts of the asset management platform.