The State of Secondaries

[Rory] Welcome to the “State of Secondaries", a webcast series from Nasdaq Fund Secondaries. a webcast series from Nasdaq Fund Secondaries. I'm Rory Mabin, and I lead the institutional side of our team here at Nasdaq. In this series, we sit down with leaders across private markets to discuss key themes shaping today's landscape. Joining me today from Warburg Pincus is Andrew DiGeronimo, Managing Director and Co-Head of Partnership Solutions. Andrew has spent nearly two decades in the secondaries market. Most recently joining Warburg after 17 years at LGT Capital Partners where he helped build and scale their US secondaries platform. He's also a fellow University of Michigan B School alum. Welcome, Andrew. It's so great to have you with us. 

[Andrew] Pleasure to be here. Thank you for having me. 

[Rory] Well, just for the sake of context setting here, you spent nearly two decades in the secondary market, and you're about a year or so into your tenure at Warburg. Tell us a little bit about your role, your background, and about the Partnership Solutions group at Warburg. 

[Andrew] I've spent nearly my whole career in the secondaries market. I had the really, truly good fortune to join a great firm in LGT Capital Partners, kind of at the start of the explosion of secondaries back in 2008. You and I are just reminiscing about the good old days. And really was just great timing, amazing firm, great mentorship to be in a position to be on the front lines, not only of an industry, but of a business and helped really scale and build, an institutional US secondaries practice for LGT Capital Partners, which has become,  tremendously successful and certainly allowed me more good fortune to have the opportunity to join Warburg last year to help them build out their GP-led practice on the back of all of this growth in the market. So my role there at Warburg really is more of the same, but different. And so really trying to, build an infrastructure on top of an incredible platform that is Warburg Pincus that will go and execute differently in the GPO market, along the lines of, frankly a vision that we collectively share about a different way of doing things in the GP-led market. And so my role is to really help build out this practice, build the infrastructure, build the go to market, and just leverage the amazing platform that I have here at Warburg at my disposal. 

[Rory] That's awesome. Yeah, and obviously, super exciting time to be in this space. As you mentioned you and I started 2008 and 2009 and we've really gotten a front row seat to the evolution of not just secondaries, but GP-led specifically. I mean, we'll talk more about that in a second, but before we do, from your perspective, why is it that Warburg Pincus is particularly well positioned to be a leader in the GP-led space? 

[Andrew] Let's just start with the market and I know we'll get into this in much more detail in later questions. Two perspectives. One is the market has changed. And I say that in, you know, GP-led was a component of the secondaries market for a long time and you could use similar tools as the market had kind of grown up using in buying LP stakes. And you can kind of use the same tools, the access, the ability to triangulate amongst the broad GP network to get perspectives on a sector or an asset you are looking for. And those tools, I think, were quite powerful. And I think enough for a long part of the GP-led evolution as the market has taken shape over the last three or four years and really has become a distinct asset class and just has gotten to a size and scale. Like, those tools, in my opinion, are no longer allowing you to discern between good and great companies. And I think this new tools are needed. And so a platform like Warburg, having being an investor, a direct investor for 60 years, a partnership for growth, a real middle market orientation, I think has just the tools that are required to scale and to find great companies in today's market going forward. So that's number one. I think number two, the two things that I focus on when I'm explaining why Warburg is different, I think about power alleys and I think about governance. And so when I say power alleys, what is the platform good at? And then how does that line up to the opportunity set? 

[Rory] Sure, yeah. 

[Andrew] And so, Warburg being a global investor, being really a predominantly middle market investor, having industry expertise across fig, healthcare, industrial, tech, and actually more importantly, like, 55 sub-sectors beneath those four core sectors that lines up like almost one-to-one to the entire opportunity set of the GP-led market. So that's  the first thing. And then governance is what can I do as Andrew, Co-Head of Partnership Solutions to attract the resources from the firm to the opportunity? And so that's around governance. And so does the firm have an incentive structure? Does the firm have a culture of collaboration that I can really get the best of the platform against the strategy? And Warburg is built that way. It's built as one firm, it's built as one incentive pool. And so all of my partners in the 280 investment team are all aligned around supporting partnership solutions and everything that we do. 

[Rory] Yeah, yeah. 

[Andrew] It's different, yeah. 

[Rory] Yeah, that makes a lot of sense. And I think that's what we're starting to see in terms of who are ultimately going to be the real value drivers in the GP-led space. It's those that can bring a deep pool of expertise and collaboration across teams. So I think that's all really important. Let's talk a little bit about where we've come from, right? So GP-leds used to have a negative connotation. When we started in 2008 and 2009, we would see fund restructurings and those were typically a pool of assets that were like the drags of the portfolio, right? The ones that the GPO is really struggling to exit. Let's talk a little bit about the evolution, kind of where we are today and let's say a decade ago, what has been the evolution in the GP-led space over the last decade? 

[Andrew] It's really exciting. It's really exciting for the market. The competitive universe and the capabilities of that peer set. And two is just the structure of the market. And so I think first is market and like, the players in the market and the secondary strategy broadly is, in my mind, the coolest position to be in 'cause it's the most flexible source of capital. All you really need is a seller and you can create a structure to enable a transaction. And that started back in the good old days as okay, we are good at buying LP stakes. We've got great access to managers. This manager has a liquidity need around a fund that, is kind of in wind down mode and only has a couple of assets left and investors want out. So like, let's create a structure to kind of help support that liquidity solution. But you know what, there were some great opportunities that were done then. Post-GFC with all the banking regulations, there were a lot of captive teams at banks that needed to be lifted out to be independent so banks can free up risk capital. And that was the next form of GP-leds, really attractive opportunities to take out captive teams, provide capital be a primary investor, buy assets, you know, all part of the secondary skillset. And then you fast forward to 2020, 2021, kind of the dawn of the single asset CV, the secondaries market was there for that. GPs were looking to find ways to exit companies but still retain governance and economics. And lo and behold, the secondaries market had a capability for that. So I think it's just the natural evolution of just the skillset and a testament to the dynamism of the secondaries market and the people and professionals in the market. And then two, it's structural, right? I think direct private equity growth was relatively linear from 2000 to 2010. And then there was this massive run-up in assets. And over the last 10, 11 years, private equity inventory has gone from a trillion to approximately 4 trillion. What's happened to liquidity? Stayed exactly the same. So it's been about 500 billion. So the first part's great. And I think that's enabling the go forward prospects of the GP-led market, but what's really driving this market opportunity is the fact that you've got three times or four times the inventory relative to a liquidity source that's been the same for the last 10 years. 

[Rory] That's right, yeah. 

[Andrew] The average inventory of private assets are seven years versus like 20 years ago, or 15 years ago would've been four years or three years. 

[Rory] Exactly, that's right. 

[Andrew] And so there's just a structural need for liquidity, which the GP-led strategy enables. 

[Rory] And actually that's a great segue. So we're talking a little bit about the idea of secondaries being increasingly tied to companies staying private longer. How do GP-leds really help meet the evolving needs of private markets as companies and managers pursue what you said, the extended growth periods? 

[Andrew] Yeah, we're part of, or at the precipice of a structural change in private markets and private markets really, and they've existed in a construct in this GP, LP construct for as long as private markets have been around and the construct doesn't really work when assets are seven years old. And so this is all part of what a future will look like when assets are being able to be held. Private companies can stay private for longer and the shareholders in those companies will have more freedom to move in and out of. And this is one step in that direction. And so what I think is, you know, the opportunity for asset owners to enable limited partners who really have no other way to exit companies other than a traditional sale, the opportunity for sponsors and fiduciaries to offer a liquidity mechanism at fair and transparent values and processes with the ability to roll or sell, like, I think that's really tremendous for the market, where structurally things will just be staying private for longer. Like, there's no way around it. And then you add to that the lack of desire for management teams to change hands, to be public companies. I shouldn't say that here, I guess, but there is also a trend that folks like continuity, folks like the private market ownership style. On top of that, fundraising is more challenging. Deal doing is more challenging. And so if you're an owner of an asset and you really believe this has staying power the idea of selling it and having to replicate that, that seems quite onerous. And number two, if you're looking out at a fundraising market and thinking like, "Hmm, am I really going to be able to raise a blind pool fund right now?" I mean, I think pick your number, 40% of the middle market will have a hard time raising a fund at or bigger than their current fund size. And so this is an opportunity for GPs to preserve their line of business, which is fund management, and retain tremendous assets. 

[Rory] Yeah, I think all of that makes sense. And look, fundraising is going to continue to be challenging as long as liquidity is challenging, right? And so this is a solution there. So let's talk a little bit about the perception. When it comes to misconceptions about GP-led secondaries, what do you wish more people understood about this asset class? 

[Andrew] The players in the market want this to work. And so it feels similar to '08, '09 when LP secondaries market came to be. Prior to the GFC, if you were selling an asset in, or a fund interest in the secondaries market, it was kind of taboo, and it was taboo because of, one, you know, you thought it was a tarnish your relationship with the manager. And two, you didn't really trust the process. It was like an opaque, lack of transparency. Then all of a sudden, GFC happens, folks have to use the market. They realized that actually t's a pretty efficient market. And it works pretty well and it's pretty fair. It doesn't cost a lot to actually sell a liquid position. And like, what do you know, the market grows 30-fold over the next 15 years. And I think we're kind of at that point right now where there's been a lot of questioning, questioning valuation, questioning process, questioning motivations, most of it fair. But I think at least, you know, I look at it from my perspective and how we're doing business and I was an LP for 17 years also. So I understand the needs of LPs and what they want and like, we want everyone in this process to feel like it's a good outcome. 'Cause that is good for the market. And if I look at how we're doing business and how my most of my peers are doing business it's a really healthy, dynamic, fair, robust market. And entrants like Warburg are only going to make it more third party, and really get to the discovery of price that I think everyone's looking for. And as more participants, i.e., LPs, create, revise their internal workings to allow them to decide with thought and consideration as opposed to it being like automatically, yes, I have to sell. You know, 'cause a lot of that's built in structurally right now. I think that will change as that progresses it will be a very fair and healthy market. And I think everyone is operating under that construct. 

[Rory] Yeah, I very much believe that that is true. And once again, great segue, I always like to wrap up these episodes with an eye toward the future. And we've talked a little bit about that already. What helps us get to a market that is the most fair, the most transparent. If we think about, where GP-led secondaries are going from here, what does the market look like five years from now or 10 years from now? 

[Andrew] What's particularly unique about the GP-led market, it is supply constrained. Meaning that the availability of capital relative to the opportunity set is just not even close, you know? And so I think there's going to be a period, you pick the number of years where every new dollar that gets raised in this market is going to go to increasing the size of the market. And I think I don't know how long that will persist. Like, how many tens or hundreds of billions of dollars of opportunities are there that are not being executed on today 'cause there just isn't capital? I don't know. There's $4 trillion of private equity inventory. Not all of it is meant for GP-leds. You know, the last three years, it's been 15% of exits. But if it's 10 or 15 or 20% of inventory that's a trillion dollars of capital against a market that was 100 billion last year. Well, 60 or 50 in the single asset market. So it feels like there's a massive runway for new entrants to come in. Not all new entrants are created equal. Not all new entrants will support the structure of the market. But I think groups like Warburg who bring real depth of knowledge across assets and sectors, and also bring real value add capabilities to allow managers to tack on mega fund capabilities to the next hold inside of a GP-led construct that's very good for the market and that will grow the market in itself. I say this all the time, “all roads lead to secondaries.” I think I amend it a little bit. I say all roads lead to GP-led secondaries. So I think there's tremendous growth ahead. I think there will be other ways companies can stay private for longer outside of a GP-led construct. I'm certain of it. And this will just be one of those enablers for companies to stay private for longer 'cause I do think that's a mega trend. 

[Rory] So you talked a little bit about  new entrants into this space. Do you think there is going to continue to be new entrants and more diversification? Is there going to continue to be a lot more specialization? Is there going to be consolidation at some point where we are seeing groups like Warburg bring a lot more capabilities under the umbrella in-house? What do you think the sort of buy side is going to look like five years from? 

[Andrew] Yeah, that's a fun bonus question. That's an episode all in itself. I think we're in a bit of a fork in the road if I think about the secondaries market in totality. Broadly speaking, I think access has been commoditized. And so what does that mean? Historically speaking, those who had a very strong and robust primary book of business, i.e., you had dollars to invest into funds, that gave you access, that access created a bit of a moat or a differentiation for you in terms of what you could do on the transactional side. And that's how the dawn of secondaries arose, right? And for a long time, that was a true differentiator. My personal perspective is access is no longer a differentiator. It's a commodity. And like, what does that mean for the LP part of the business? To me, it means it's no longer about asset selection, it's about distribution. It's about content manufacturing. And lo and behold the rise of retail and the rise of evergreens that is you or a firm monetizing its access by delivering a product more broadly. And I think actually that's where the LP part of the business is going. I think structurally, returns are coming down 'cause more capital's coming in and it's no longer about selection, it's about distribution. And I think on the GP-led side, it's moving rapidly towards specialization because at the today, you can no longer rely on GPs telling you like, "Wink, wink, nod, nod. This is a great opportunity. You should do it." Because everything's for sale. And so you really need to know the company, the management team, the sector, be able to look around corners. And the only way you can do that is if you're deep on an industry. So I think the market is moving rapidly towards specialization. There will be many more GPs that have a narrow right to win in a particular part of the GP-led secondary market that try to enter versus those who actually have a platform, a governance structure to enter in at an institutionally-scalable way. And so I think there will be lots of new entrants that hit the press. I think the staying power will be much more limited to those who actually have a platform and a firm that can do this at scale and line up with the GP-led opportunity. So I think it's all good. I think all press in the GP-led market right now is good for the market. I think that it'll be much fewer who actually can build an institutional-scaled business. 

[Rory] Awesome. Well, thank you so much for joining us today and for the conversation and for sharing your insights into the evolving landscape of GP-led secondaries and the role Warburg Pincus plays in driving innovation in strategic solutions in the private markets. From the shifts in portfolio management strategies to the increasing sophistication and acceptance of continuation vehicles, it's clear that GP-leds are shaping the future of extended private growth. We appreciate you joining us for today's episode of the "State of Secondaries". If you'd like to learn more about Warburg's Partnership Solutions Group, click the link below the video. We'll see you next time.