73 Strings' Yann Magnan - unlocking valuation intelligence in private markets

00:04:11 · Yann MagnanPlay from here

[00:04:11] S0: I started my career twenty five years ago. I started my career as a corporate finance and valuation consultant at first at EY before in France, then I moved to a US consultancy called at that point in time Duff and Phelps, and now known by the name of Kroll. As you rightly pointed out, everything that I was doing at that point in time in the early days, everything that I was overseeing my teams doing back a few years later, and then everything that I was seeing my clients doing at that point in time as well, everything was when it comes to valuation of non listed assets, everything was manual, manual as in Google search, Excel and email. As a person, I'm fairly nervous and I like efficiency. I was thinking that does not really work. Excel, Google search, email, think twenty fifteen, 2018, 2020. You start hearing about the cloud industry. You start hearing about the generic AI to start with. And you're just thinking there must be ways to do things differently. There must be ways to create efficiencies. And there must be ways to do valuation in a framework that is governed and auditable and traceable so that at the end of the day, you can develop this valuation in the best possible way, in the fastest possible way, in the most structured and auditable and traceable type of way. So with that as an idea and as a vision with a few of my colleagues in 2020, we started seventy three Strings and the play was, the idea was let's develop the platforms. Actually, have two, one that covers equity instrument and the other one that covers credit instruments, different valuation methodologies. So let's create platforms that will basically facilitate the evaluation work that would create that governed and structured framework that the managers would be able to use so that they can continue to grow and grow pretty fast. And as you know, the industry has been growing, what, 1015% year over year, I would say. The ads industry at large. So enable this industry, these managers to grow and support their valuation processes and the middle office processes in a way that is scalable for them. We started in the summer of twenty twenty. We've had a pretty nice ride since then. And we've seen something happen actually, and we've had that conversation quite a few times, you and I. We've seen something happen in the past twelve months.

00:06:24 · Yann MagnanPlay from here

I mean, it started a bit earlier than that, I would say two years ago. But really in the past twelve months, what we've seen happen is that on top of the growth of the industry, we've also seen the trend towards evergreen funds and private capital GPs trying to attract retained investors into their capital. We've seen that accelerate dramatically in the past year. And that creates a lot of new challenges for these managers on multiple fronts, not just on valuation and middle office, but in particular when it comes to middle office and valuation. Because suddenly you have people like you and me that invest into these funds and we are very happy to do that. We are very happy to be able to invest capital in an industry that generates significant return as long as you pick the managers appropriately. But the thing is that when we do that, we want to make sure that we can do some arbitrage in our portfolio. We want to make sure that we can enter in this type of funds almost at any point in time. We want to make sure quite often that we want to exit as well, as we have seen lately, almost at any point in time. And that changes a lot the way our clients are basically operating because you're not anymore in that closed ended fund where capital comes in and capital comes out at the end of the fund. You're in that environment where transactions are happening across the life of a fund. And it's not just that these valuations are being used for reporting by the way, these valuations are being used for transactions. That creates another challenge to our clients.

00:07:53 · Michael SidgmorePlay from here

[00:07:53] S1: A number of interesting points that I want to unpack. But on the last point that you just made, clients are using these for transactions, both in terms of trying to make sense of maybe they need to sell an asset, particularly if it's in an evergreen, because they need to be able to continue to season that portfolio, add new assets to the portfolio, exit other assets. You have the growth of not just evergreens, but of continuation vehicles. How do you think about the importance of valuations today relative to the private capital industry when you were in it at Kroll or Duff and Phelps, etcetera. Are there things that have really changed about how both GPs and LPs are thinking about valuations and how they think about doing them?

00:08:40 · Yann MagnanPlay from here

[00:08:40] S0: Dramatically, actually. Back a few years ago, valuation was mostly a reporting exercise, a very important one. You want to make sure that your institutional LPs get a robust reporting every time that they want this robust reporting, typically quarterly basis. But what has changed with the trends towards Italy investors and evergreen funds is that people are suddenly transacting on these evaluations. And when they are transacting on these valuations, actually they are doing two things. They want to sell an exit, but they want to sell an exit comparing and understanding what's the value of their illiquid holdings as compared to the value of their liquid holdings. So they are comparing both. And so what that means is that we are moving from the world where valuations of non listed assets were very isolated. They were reporting information into a world where these relations need to resemble and to mimic as close as possible the public world. It's very interesting because when we speak to clients about evergreen retail, the first question is about technology and creating efficiency. That's true. That's a very important one. But the second question, very important as well, is that the philosophy that you are applying to develop these valuations is very, very different as well. You have to be much closer to how the market operate because if you don't and if you create a valuation that is theoretical, maybe slightly on the more cautious side of things, you as a manager take the risk that some of your retail investors are going to come to you and tell you, well, I don't understand. I transacted on this valuation based on information you provided me with. But actually it might have been slightly biased, not wrong, but slightly on the more cautious side of things. If you had told me that it was not the case, I would maybe have taken a different decision. So the entire philosophy is also changing.

00:10:27 · Michael Sidgmore, Yann MagnanPlay from here

[00:10:27] S1: When I hear you talk about that, where my mind goes is you're taking a back office process and it actually... So post trade or post investment, it actually feeds into pre trade or pre investment because to your point, there's new investors coming into an evergreen fund at a certain point in time when they strike a NAV. There's existing investors who may want to invest more. There's existing investors who may want to redeem some. There's GPs who may need to figure out how to continue to manage that portfolio. It's almost as if that the back office is becoming part of the front office as it relates to how you understand value, market, and then ultimately distribute these evergreen funds? [00:11:11] S0: Yeah. I mean, it depends how you define the front office. In my world, typically front office is the investment team, they invest and they exit. But if you think about the GP, you would probably not contradict me, one of the key function of a GP is actually to raise capital. And if you look at it from that perspective, to raise and invest the capital, but starting with raising the capital. And you start from that perspective, you have a new constituent, a new group of stakeholders that are not the typical institutional LPs that have certain ways of looking at things and certain ways of thinking at things. You have a different group with very different ways of thinking at things and looking at things, and you have to balance both. And that's a very different exercise.

00:11:11 · Yann Magnan, Michael SidgmorePlay from here

[00:11:11] S0: Yeah. I mean, it depends how you define the front office. In my world, typically front office is the investment team, they invest and they exit. But if you think about the GP, you would probably not contradict me, one of the key function of a GP is actually to raise capital. And if you look at it from that perspective, to raise and invest the capital, but starting with raising the capital. And you start from that perspective, you have a new constituent, a new group of stakeholders that are not the typical institutional LPs that have certain ways of looking at things and certain ways of thinking at things. You have a different group with very different ways of thinking at things and looking at things, and you have to balance both. And that's a very different exercise. [00:11:49] S1: You talk about this being a different exercise. What exactly is different about it, and what skills or tools do GPs need to have to be able to do that properly? [00:11:59] S0: Until recently, capital was supposed to be private, and it is private. It's like these assets are not traded. Why would we get to a value that would mimic anything that's public? Well, the reason is that because now you have investors that expect you to do that. Otherwise, they can't really transact. And that's what's changed a lot in the past year.