The Future of Secondaries: How NFS is Leading Innovation in the Private Fund Secondary Market
Chris Tinsley and Rory Mabin lead Nasdaq Fund Secondaries (NFS), the private fund liquidity service within Nasdaq. We sat down with Chris and Rory to understand how NFS is bringing efficiency, transparency, and scalability to secondary transactions in the private fund space, and why they believe technology will play a crucial role in this market going forward.
Q: Let’s first set the scene- can you tell us about the path you took to get to your current role at Nasdaq Fund Secondaries (NFS)?
Rory: I've been in this industry for my entire career, starting in 2009, right after the great financial crisis when liquidity was at a premium for everyone, and deals were being done at steep discounts to Net Asset Value. I come from the deal execution side, so I became intimately acquainted with all the pain points of executing transactions in my early career. I’ve only ever done this, so watching the evolution of this space over the last fifteen years and now building a technology that has thoughtfully streamlined those operational pain points has been gratifying and very validating.
Chris: I had a circuitous path to Nasdaq in that I came from the institutional consulting world early in my career, 20 years ago, and worked with several large family offices in the Seattle area. I ultimately founded a company building a buy-side research management platform focused on multi-manager portfolio selection, which I sold to Nasdaq in 2018, and have been here ever since. I spent a few years with our analytics organization and then made my way to secondaries a couple of years ago when we had just spun-out Nasdaq Private Market and rebranded the private fund team as Nasdaq Fund Secondaries.
I was very intrigued by the idea we could apply technology to a workflow that was, and often still is, a pen-and-paper endeavor. My background is building technology to solve hard problems, which is exactly what we are doing here. There is clearly a lot of manual effort that can be done with technology, and we had the opportunity to do what Nasdaq did 50 years ago for public markets with the private market.
Q: Can you explain the history of the Fund Secondaries business? How did it start inside of Nasdaq?
Rory: Nasdaq Fund Secondaries was born out of the acquisition of a platform called Second Market in 2015. What Second Market had done was build out a technology platform that was specifically focused on facilitating liquidity events in the private company space. Everything from doing diligence, price discovery, and documentation, all the way through payment and settlement was facilitated through the Second Market platform. When Nasdaq acquired Second Market, we started to think about how we could build out this technology to be able to facilitate the same streamlined deal flow, the same kind of efficiency and scalability, but for other private asset types.
At the same time, we started down the path with regulators. We focused on building out the existing technology, yes, but also the regulatory infrastructure to be able to provide liquidity solutions for private funds. What that translates to today is that we operate a broker-dealer subsidiary for the purpose of providing paying agent services in connection with private fund secondary transactions. We also have the benefit of a private letter ruling from the IRS that confirms that the platform can be operated to meet the requirements of a “qualified matching service” (QMS) under §1.7704-1(g) of the Treasury Regulations. All of that is to say that from 2015 to 2018 we were building out the framework to allow us to expand our capabilities to other private asset classes.
Adena Friedman, who came back to Nasdaq from Carlyle in 2014, was focused strategically on the private fund space, and how we could use this technology to be able to provide the same type of access to liquidity in private funds, in addition to the private company events hosted on the Second Market platform. Eventually, Nasdaq spun out the private company business in conjunction with a consortium of banks back in 2021 and rebranded the private fund team as Nasdaq Fund Secondaries.
Taking a step back though, our first major partnership on the private fund side was in 2018 in the private wealth space. That partnership gave investors in feeder funds the opportunity to participate in structured auctions hosted on the NFS platform on a quarterly basis. Investors receive live, actionable bids for their interests, and may complete document signing, transfer approval, and settlement through the platform.
Q: How has the business developed since that first deal in private wealth?
Rory: Since then, we’ve been focused not just on the wealth channel (which made a lot of sense as a starting point considering the need for efficiency and scalability), but expanding upmarket to serve the institutional space- to provide the same type of structure and technology-backed efficiency in private funds but in the institutional world, and that’s where we are today.
Q: Can you talk about the institutional side of the business?
Rory: We're focused not just on solving for liquidity needs today – whether it is adding transparency to the execution process or using our QMS to clear transfer queues – but helping GPs think strategically about how to address liquidity for investors in a more proactive way going forward. From a GP’s perspective, it is a powerful thing to be able to say with confidence that you have not only considered future access to liquidity for LPs, but you have a plan in place to address it with a partner like Nasdaq Fund Secondaries.
Chris: We talk to anywhere from five to fifteen GPs a week, and even in the last two years, we have seen a clear perspective change from GPs on their being able to provide LPs with a more efficient path to liquidity if it’s needed because the distributions that LPs have expected in the past just haven’t been there in recent years. If a GP is trying to raise new funds and the LPs don’t have funds for new commitments, they need to generate their own liquidity somehow.
Regardless of whether the exit market changes, I don’t see these innovations from the liquidity perspective going anywhere. In my view, these are tools that investors are going to absolutely expect to be there in the future as well.
Q: In what ways does NFS work with GPs to provide liquidity?
Rory: One of the structures we provide, if you refer back to our partnerships in the private wealth space, is quarterly access to liquidity for LPs. Sometimes it’s semi-annually or annually but helping GPs provide a coordinated event across all their funds for potentially all their LPS. We like to call these regularly coordinated auctions GP-sponsored events.
NFS is currently one of the only providers in the market of which we are aware that has a Private Letter Ruling (PLR) from the IRS specifically confirming that the NFS platform meets the requirements to be a QMS under §1.7704-1(g) of the Treasury Regulations. We think this option provides GPs and their investors with an added (and meaningful) level of comfort around potential tax liabilities arising from transfers in secondary transactions. This is particularly relevant for GPs who want another way to return capital to their investors during increasingly competitive fundraising cycles because up to 10% of the interests in a fund can be transferred during its taxable year without triggering publicly traded partnership status, provided those transfers are made through a QMS like the NFS platform, versus 2% if the transfers are not made using a QMS.
Chris: A few years ago, a US-based investment firm partnered with us on their GP stakes fund on a service we describe as “embedded liquidity”. The fund itself is perpetual in nature, so while they have a limited vest period, the underlying assets have a perpetual life to them and don't always have a natural exit. Prospective investors wanted a more structured liquidity program. We came up with a unique structure where the GP wrote NFS into the LPA saying that starting year five of the fund, on a bi-annual basis, NFS would run GP-sponsored events for all their LPs. It’s a powerful differentiator in a crowded fundraising market to be able to say to investors that you have thought about liquidity proactively and have partnered with a leader in market technology, to build a liquidity mechanism into the fund, should you ever need it.
Q: From a practitioner's perspective, what are the important pieces that NFS brings to the table that some of the other providers are lacking?
Rory: I love that question. It’s easy enough to run an auction, but anyone who has gone through that process knows that the hard part is everything that comes after price matching. We support auctions and facilitate true price discovery through competitive market dynamics driven by GPs having access to our institutional network of established secondary buyers. We also support the diligence process, document execution, and payment and settlement, all through one end-to-end platform designed to work seamlessly. Further, there is real value in the transparency we provide GPs into the progress of the deal- who is involved, where they are in the document signing process, and payment and settlement. That in itself is so powerful. We are currently the only true, end-to-end private fund secondaries platform that supports the entire workflow.
Q: Some say volume in the market is set to go to $1 Trillion in the next decade or so. What needs to happen in the industry to get to that number?
Rory: To do that, we need to address some of the hurdles that slow down the deal flow in this market. What I mean by that is that there needs to be some meaningful level of technological advancement to allow real efficiency, transparency, and scalability around deal execution. We hear from LPs that they would love to participate in the GP-leds that they get notices for each quarter, but they don’t have deal teams they can dedicate to focus on secondaries. To increase volume, we need to reduce resource burden, and we believe technology is the answer to that.
Chris: The limiting factors that we can address are taking that partnership tax safe harbor from 2% to 10%, streamlining those manual processes on a central platform, and lifting the resource burden on deal teams. There are a lot of individual factors that can add up to meaningful increases in volume in the market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.