The Distribution by Juniper Square
00:05:39 · David Wachter
[00:05:39] S0: So the crossover was... So at the time, it was sort of the Apple two and the beginnings of what was sort of dial up Internet. So you could log in and play games and get information like the weather, very basic stuff. But I, in fact, did start a business to distribute dial up Internet data services. So kind of precursors to the Internet. And literally drove around Boston after coll... During college, delivered startup kits. So... But I was very passionate about computers and engineering and tech. And I coded. I I was paid to write databases for small businesses and loved it. And then when I did start at Lehman Brothers, a guy who was one of the pioneers in tech investing joined to run Lehman's tech department. And he was the... He's the guy that took Apple public and Intel public and Lotus one two three. And I'm like, okay. Instead of learning from the bottom up, I can learn from the top down. So I stuck with Wall Street a couple of years after he joined Lehman Brothers. He tapped me on the shoulder and he said, let's get out of here. I'm gonna go restart a successor firm to a successor firm to what was L.F. Rothschild. So I did tag along with him, spent nine years there as the head of banking and effectively the number two, and then was recruited away to a bigger firm, Jefferies. I ran tech banking at Jefferies. And while there, I saw that there were a lot of companies getting funded and overfunded, and then the internet bubble burst. And I said, what are... What's everyone gonna do with all these companies? So I left, hung a shingle called W Capital. I couldn't come up with any more of a creative name than the letter w for my last name and started sourcing deals and ended up fortunately getting financing from Goldman on a deal by deal basis and bought portfolios from small places like Intel and American Express and Ford when the CFO said, just get rid of all of the stuff you guys did over the last few years and ended up getting positions in some really cool companies like OpenTable and Pandora and RiskMetrics and some real winners. And that led to sort of committing to being a liquidity provider in the private capital markets and refined it more and more over the years. A lot of refinements because it was a very nascent market when we started.
00:08:27 · Brandon Sedloff
[00:08:27] S1: Yeah. Well, that makes a lot of sense. And if we had hours, I would love to pick your brain and hear all the stories, from the tech banking days, but, you know, that'll be another conversation. So W Capital. So when you started it, you just talked a little bit about the situation, tons of liquidity, the bubble burst. Kinda what... You know, for our listeners who... You know, secondary... You know, secondaries and liquidity solutions are a big topic right now. You just mentioned all the excitement from the meetings, but a lot of people may not understand kind of the origin of this space. So maybe walk me through some of the different refinements and iterations that happened from what you saw when you started W Capital and, you know, through to today. I mean, obviously, you know, high level, but it... It'd be interesting just to understand kinda how the industry has matured and evolved.
00:09:09 · David Wachter
[00:09:09] S0: Sure. So what's interesting is there's sort of different tracks of asset management, and each of them has developed its own sort of secondary market. So to start with LP led secondaries, sort of the default on what was a secondary for two decades was the LP led, which is the buying and selling of LP stakes. That's the early players there, Coller Capital, Goldman, Blackstone, Strat Partners, a bunch of others, Lexington, Landmark. And I never viewed what the market needed as LP led. I viewed what the market needed as what is the company and its shareholders going to do when they're just not ready to go public. And the bar got higher and higher over time, meaning that investors and companies are going to own them longer and longer. And then what happened is the sponsor to sponsor m and a business started to become a real trend. And when one sponsor sells to another sponsor, they very often keep a rollover equity position. So over our first decade, happened was you have more shareholders in these privately held businesses, and you have some that are owning their shares for three years and others that are in the deal for five to eight or even ten years. So you have this different duration. We call it misalignment. You have different risk profiles. Some investors want their money back. Others wanna put more money in. So you've got this ecosystem where you need more liquidity and you need the alternatives. So that's what we've always done. We've been the buyer of those positions when one investor is looking for liquidity and others aren't. Another big breakthrough was what we called the private company tender offer. So the IPO market started to become more challenging, but employees in these private companies were waiting for five to ten years for their stock options to become currency so that they can buy a house and pay for school. And it wasn't happening. So in order to retain employees, we sort of came up with this marketing tool, which is let your employees sell some of their shares and we're experts in how to organize a tender offer. So we did that. And it was a huge success and these companies viewed it as a huge win. It extended the life of these businesses. It created better alignment, and it was just a win for everybody. Another milestone in the industry was the liquidity for rollover equity in buyouts.
00:12:02 · David Wachter, Brandon Sedloff
So buyouts became more relevant to the secondary market. And when one sponsor sold a company to another sponsor, but kept equity, that sponsor now became a minority shareholder in the business. And what happens when the lead investor, one of the bigger firms wants to grow it and do more M and A and extend their hold period, but the other firm who rolled their business now is stuck in the equity? So we found those as great opportunities too, which is tag along with the larger sponsor and provide liquidity for the smaller sponsor that wanted to get liquidity. But the biggest change is the last three to five years when interest rates changed and the private equity market truly had a a a massive change in the scale of the industry and the liquidity profile for LPs and GPs. [00:13:01] S1: Maybe let's pick up on that last point. So I think that's an interesting overview. And I guess all of that is set against the backdrop of the stock market collapsing or the bubble bursting back in the early two thousands, the tech bubble, and companies are staying private for longer and or there was distress. Right? I mean, is that kind of the the kind of macro framing that this industry evolved under where these private companies needed and their employees needed liquidity solutions?
00:13:01 · Brandon Sedloff, David Wachter
[00:13:01] S1: Maybe let's pick up on that last point. So I think that's an interesting overview. And I guess all of that is set against the backdrop of the stock market collapsing or the bubble bursting back in the early two thousands, the tech bubble, and companies are staying private for longer and or there was distress. Right? I mean, is that kind of the the kind of macro framing that this industry evolved under where these private companies needed and their employees needed liquidity solutions? [00:13:28] S0: Or or So the interesting thing is you used the word distressed. So during the last twenty years, you can hardly say that, like on, on the long term basis, we've had distress. We've had the greatest capital market expansion in history, and there's been huge growth and benefits. But we don't like to use the word distress because liquidity is a positive tool, not a sign of distress. So really important. And that's what we've been saying for a very, very long period of time. I think all parties involved in the secondary market, whether you're a GP, LPs, or players like us, you view this as a solution tool and a new embedded part of the private and public capital markets. So other than the word distress, you're completely right.
00:13:28 · David Wachter, Brandon Sedloff
[00:13:28] S0: Or or So the interesting thing is you used the word distressed. So during the last twenty years, you can hardly say that, like on, on the long term basis, we've had distress. We've had the greatest capital market expansion in history, and there's been huge growth and benefits. But we don't like to use the word distress because liquidity is a positive tool, not a sign of distress. So really important. And that's what we've been saying for a very, very long period of time. I think all parties involved in the secondary market, whether you're a GP, LPs, or players like us, you view this as a solution tool and a new embedded part of the private and public capital markets. So other than the word distress, you're completely right. [00:14:20] S1: I think that's I think that's important, and I totally appreciate that perspective because I think when we think about what the misconceptions are, one of the things that I've heard over and over again when talking to some of your peers and others in this space is this idea that it's a solution, not not distress. So I appreciate the clarification. [00:14:37] S0: Yeah. Yeah. [00:14:38] S1: So talk to me about where we are today. Obviously, the, you know, the interest rates have gone up. The private, you know, equity markets have changed substantially over the last three to five years, as you said. So what what is that what is that change that we're undergoing right now look like from the front lines as you see it through the lens of of your business at W Capital?